I have been wondering when the ECB would finally pull the plug and put a stop to the ELA.
Today, amid an accelerating run on Greek banks, the ECB capped the ELA.
The Guardian has a Live-Update on the crisis.
Here is the key point “No more extra emergency funding to Greece’s banks, despite steady outflow of deposits since crisis escalated.“
Capital Controls, Bank Holiday Coming
Economics professor Karl Whelan says Capital Controls Coming
Professor Karl Whelan of University College Dublin just launched a blogpost which explains why he thinks some Greek banks won’t open tomorrow.
The ECB’s decision to cap emergency liquidity at its current level means capital controls are now coming, he argues.
That’s because commercial bank reserves have probably been significantly depleted by the rush to some cash machines this weekend.
So, they have little left in cash or reserves at the central bank, leaving them exposed when they open their doors on Monday morning.
Professor Whelan explains:
In that case, the only way the Greek banks could finance the (presumably very large) demands for withdrawals on Monday would have been to get access to additional funds from the Bank of Greece in the form of additional ELA. That will not be possible now, so most likely the banks will not open on Monday.
The statement that “ECB will work closely with Bank of Greece to maintain financial stability” is probably code for “ECB will help Greece to design a programme of capital controls”.
So it has come to this. No matter how well things go from here (and positive scenarios are hard to imagine) restrictions on Greek banks could be in place for a very long time.
It is easy at this point to panic and say it’s the end of the world and a new currency must be days away. It’s worth remembering, however, the Cyprus coped surprisingly well with its capital controls and ultimately they were lifted this year and the banking system survived. There is probably still a small window of opportunity left to keep Greece in the euro, even if the banks don’t open tomorrow.
Greece now gets to blame the ECB for bank failures. This move likely seals the deal on the July 5 referendum (See Tsipras Calls July 5 Referendum on Creditors’ Demands; Merkel Says No Alternative to Creditor’s “Generous” Offer).
Mike “Mish” Shedlock