The next step for Greek banks

Banks in Greece are standing on brink of failure as rapid deposit outflows jepordise cash strapped country’s future

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

With funding from the European Central Bank (ECB) keeping the Greek banks afloat, a domino effect could follow an unfavourable change in Athens as it heads towards a default and possible exit from the eurozone.

Former ECB board member Lorenzo Bini Smaghi told daily Corriere della Sera on Sunday that the ECB will no longer be able to back Greek banks as uncertainty looms the county.

"Given the uncertainty over Greece remaining in the euro the ECB will no longer be able to supply liquidity to the Greek banks, who in turn will be unable to supply euros to their clients," he wrote.

He then continued to note the tragedy Greece’s citizens are likely to expect. They will rush to withdraw their money out of banks but will “probably not be able to do so."

Greece’s funding options are close to hitting rock bottom while nervous savers continue to withdraw billions of euros out of banks as debt talks look likely to fail.

Every euro pulled out from an ATM is supported by emergency funding from the ECB. Without an extension to the bailout programme, these ECB emergency loans are at risk.

Greek Prime Minister Alexis Tsipras on Sunday called his nation to vote in a referendum for bailout terms, offering proposals to reduce the pressure on bank balance sheets. Thus, each proposal comes with a cost.

If the ECB was to curb 89 billion euros of emergency funding, the cash strapped country will have two main options - bank holiday or capital controls - the Financial Times reports. 

A bank holiday is known to be a day when banks are officially closed. However, this has a negative impact on the economy as bank transactions officially come to a halt. This, on the other hand, is seen to be the best way to protect banks from failure during a stressful period.

Conversely, capital controls make room for withdrawals from ATMs and some payments but do have limits. This process is a little more difficult as it take minimum three days to take place and banks need to sufficient funds available to meet demands.

If a wave of capital controls hit the debt burdened country or banks ultimately fail, those with no other financial security outside of Greece will be the most affected.

TRTWorld and agencies