Greek banks seen days from breakdown as bailout talks resume

Greek banks may be facing the end game.

The European Central Bank is tightening the credit that’s their only lifeline. Money was pouring out of customer accounts before banks were closed and capital controls imposed a week ago. The prospects of Greece reaching a deal with creditors remain slim after its voters rejected austerity on Sunday.

It all adds up to the probability that shareholders, depositors and taxpayers will be tapped to avoid outright failure, according to a person with direct knowledge of discussions on lenders. The crippled financial system poses the greatest threat to Greece remaining in the euro, and the ECB’s cutback in collateral may worsen the banks’ plight.

“Greek banks cannot afford any kind of restriction,” Nick Kounis, head of macro and financial markets research at ABN Amro Groep NV, wrote in a note to clients Tuesday. “The Greek banks were projected to run seriously short of liquidity by Friday. So the haircut will bring that even closer.”

In its clearest expression of concern about future aid to banks, the ECB said in a Tuesday statement that it would take “moral hazard” into consideration when deciding on emergency liquidity assistance (ELA) to financial institutions.

“The objective of ELA is to support solvent credit institutions facing temporary liquidity problems, the document said. ‘‘It is not a monetary-policy instrument.’’

Departing deposits

Greece’s attempts to reach an agreement with creditors over the past five months have failed, triggering deposit outflows, increasing non-performing loans and damping economic activity. Banks have been closed since last week and daily ATM withdrawals are limited to 60 euros. Greece’s financial system will be discussed at Tuesday’s meeting in Brussels with Prime Minister Alexis Tsipras and European leaders.

For months, Greek lenders have been locked out of standard ECB refinancing operations, running up a tab of 89 billion euros in emergency lending, or ELA. The ECB froze the ELA on June 28, prompting the bank holiday and controls after the plebiscite was announced.

The ECB sees Greece’s financial system surviving without an injection of extra liquidity at least until after Tuesday’s summit, people familiar with the matter said Monday. The governing council that day rejected a Greek request to increase the emergency line by 3 billion euros. It also raised the discount on the government debt pledged as collateral to 45 percent, a person familiar with the matter said, effectively forcing banks to exhaust more of their available collateral.

Options studied

The Frankfurt-based institution is set to review the situation Wednesday. The four largest banks either declined to comment or weren’t available to comment.

Greek banks have more collateral than needed and as much as a week of cash left, said billionaire Wilbur Ross. His investment firm, WL Ross & Co., joined other investors in injecting 1.3 billion euros into Eurobank Ergasias SA, one of the nation’s four largest banks last year. Ross spoke in an interview on CNBC.

The range of options regulators are considering include deploying a backstop from creditors for banks under a new bailout agreement to attempt to raise capital privately, said the person. Alternatively, banks could impose a levy on deposits, an option that would first require a contribution from stockholders and bondholders, the person said.

A third option, consisting of seizing deposits on accounts of more than 100,000 euros, is also on the table, said the person. Such a ‘‘bail-in” of unsecured deposits was a feature of the 2013 Cyprus rescue package, with accounts above that insurance ceiling tapped. In Greece, deposits shrank by almost 40 billion euros between December and June this year.

Middle class

Penalizing depositors is “virtually anathema,” Petros Doukas, the former deputy finance minister, told Bloomberg Television. “It would strike at the heart of the middle class and be very destructive for the economy.”

The four largest Greek banks have failed and would also have defaulted without capital controls, Fitch Ratings analysts wrote in a note July 2. Liquidity and solvency are very weak and some banks may be nearing a point where unwinding them becomes a real possibility. Loans overdue by 90 days or more accounted for 36 percent of domestic loans at the end of March and arrears probably have increased significantly since then.

Francois Cabau of Barclays Plc’s economics research sees shareholder equity being wiped out if a deal with creditors isn’t reached.

[Bloomberg]