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All eyes on ECB after Greek 'No' vote

July 6, 2015 - 23:24 By 신현희

FRANKFURT (AFP) -- All eyes turned to the European Central Bank Monday following the resounding 'No' in Greece's referendum, as it is seen as the only institution capable of stemming market panic and preventing the Greek economy from collapsing.

In Sunday's referendum, more than 61 percent of Greeks rejected creditor demands for further austerity in return for more bailout funds, sending Greece's eurozone partners scrambling to respond.

Until now, the ECB has agreed to keep Greek banks -- and, by extension, the debt-wracked Greek economy -- on life support via the eurozone's Emergency Liquidity Assistance or ELA facility.

But the overwhelming 'No' vote has made it more difficult for the ECB to justify keeping that lifeline open.

"The ECB's hands are tied by rules," the head of the Austrian central Bank, Ewald Nowotny, told the public broadcaster ORF.

"We have to assess the situation each time anew. And I'm afraid that events in Greece have not made it easier for us," Nowotny said.

Analysts agreed.

"Without a clear prospect of an immediate bailout deal that could prevent a full-scale sovereign default ... it is very hard for the ECB to authorise continuing emergency support for Greek banks, let alone to allow an increase in such support," said Berenberg Bank economist Holger Schmieding.

The Bank of Greece has requested an increase in ELA liquidity.

And in the flurry of talks on possible ways forward, ECB president Mario Draghi -- who earlier talked with EU Commission chief Jean-Claude Juncker, Eurogroup head Jeroen Dijsselbloem and the president of the European Council Donald Tusk -- was scheduled to chair a meeting of the ECB's governing council to discuss that request.

Doing the 'dirty work'

"While politicians in the eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work," said ING DiBa economist Carsten Brzeski.

"The 'No' has not made the ECB's life any easier. With every step that Greece is moving closer to total default or even a 'Grexit' and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA," Brzeski said.

ELA is currently the only source of financing for Greek banks, and therefore the Greek economy. But with Greece's bailout programme now officially expired and in the absence of any new programme, the conditions for its continuation are no longer met.

But analysts believe the ECB will not want to be the one to pull the plug on Greece and force the country out of the single currency.

"The ECB will not be the one pulling the trigger on Greece. As long as eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels," said Brzeski.

Berenberg Bank's Schmieding agreed.

"We look for the ECB to play a holding game today, not cutting ELAs but possibly telling European leaders that without a clear political signal, ELAs would have to be cut soon," he said.

Until now, the Frankfurt-based ECB has pulled out all the stops in a bid to prevent a so-called "Grexit" -- or Greek exit from the eurozone.

But some of the ECB governing council members believe that constantly violating the single currency's rules, as Greece is perceived to have done, is just as destructive.

Bundesbank hard line

For that reason, the head of the German central bank or Bundesbank, Jens Weidmann, has consistently voted against ELA in recent weeks. And support for his hardline stance could grow on the ECB governing council.

A two-thirds majority would be needed on the 25-seat board to shut down ELA.

Deutsche Bank economist George Saravelos predicted that for Greek banks, ELA liquidity was likely to be fully exhausted over the next few days.

That would leave cash machines empty and Greece would no longer be able to finance imported goods via outgoing payments.

The ECB's patience is unlikely to last forever and could run out later this month, when Greece is due to repay 3.5 billion euros ($3.9 billion) in loans to the ECB on July 20.

If Greece is unable to meet the deadline and defaults on the payment, "it is very hard to see the ECB continuing ELA," said Brzeski.

The head of the French central bank, Christian Noyer, insisted that the ECB could not allow a restructuring of the debt Greece owes it.

"That would constitute monetary financing," which is expressly forbidden in the ECB's statutes, Noyer said.