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June 15, 2015

Will an ECB Ultimatum Work on Greece This Time?

It was Greece’s “last chance,” again. But Sunday, it too fell apart, as they always do. European Commission President Jean-Claude Juncker broke off his attempts to mediate between Greece and its creditors. The differences were too large, a spokesperson said.  

Now there’s a new “last chance” in this mutual extortion racket. The 19 finance ministers of the Euro Group will meet this Thursday in Luxembourg. The spokesman said that Juncker “remains convinced that with reinforced reform efforts on the Greek side and political will on all sides, a solution can be found by the end of the month.” So probably not.

“Last chance,” because otherwise there wouldn’t be enough time for the parliamentary processes required by other countries to approve the new bailout deal before the payments come due.
But even before this “last chance,” the ECB will meet to decide, once again, the fate of the Greek banks, and thereby Greece.

It doesn’t help that the financial markets aren’t swooning every time “Grexit” appears in the media. Greece has lost its negotiating power. The financial markets have other things to worry about. But the markets in Greece have crashed, and Greek banks have been reduced to penny stocks.

Even supporters of the Greek positions are losing patience with Greek game theory. In an interview published on Sunday, Italian Prime Minister Matteo Renzi told the Corriere Della Sera: “We all want Greece in the Euro, but they have to want it too.”

German Vice Chancellor Sigmar Gabriel, head of the center-left Social Democrats (SPD), who has been largely supportive of Greece’s efforts, chimed in more forcefully via the tabloid Bild:
We want to help Greece and keep it in the euro. But time is running out, and so is patience all over Europe. Everywhere in Europe there is a growing sentiment of ENOUGH.”
Repeated, supposedly final attempts at an agreement are beginning to make the whole process look ridiculous. More and more people feel that the Greek Government is leading them around by the nose.
So all eyes are on Thursday. But on Wednesday is the ECB Governing Council’s “non-monetary policy meeting.” This is typically when the ECB decides to extend the Emergency Liquidity Assistance (ELA) for Greece, without which Greek banks are instant toast.

Last Wednesday, the Governing Council decided by teleconference to raise the limit of the ELA by €2.3 billion to a total of €83 billion. Every week, it raises the limit. The Greek central bank provides the dough, but when the banks collapse, that dough will be gone, yanked out by the Greeks themselves.

Greeks trust their banks – or any of their institutions – only as far as they can throw them. So private-sector bank deposits have plunged to a new 10-year low, from their peak of nearly €240 billion in 2009 to €134 billion by the end of April. Over the five months through April, Greeks had yanked out €31 billion! This process has likely continued at an even more frenetic pace to this day, with cash largely provided by the ELA.

When Cyprus reached a point similar to this, the ECB had a meeting that sealed the fate of Cypriot banks and their depositors, many of whom were Russians. Putin, who’d been trying to repatriate Russian money, got a good kick out of it. The ECB’s bone-dry, infamous press release:
21 March 2013 – Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus: 
The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013. 
Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.
Cut off ELA, and it’s over. A bank holiday followed. On March 25, the Troika announced a bailout that bailed in depositors, imposed capital controls, locked up whatever funds were left in the banks for months, forced “reforms” on Cyprus, and did all kinds of other things.

If this sort of press release is issued for Greek banks this Wednesday, or really any day, it’s over. Capital controls, bail-ins, a parallel currency… a whole smorgasbord of “solutions” come to mind. That doesn’t mean that Greece would have to – or even could – exit the Eurozone. But just like Cyprus, it would exit the extortion racket. Then perhaps, the Greek government and the Greek people could focus on how to rebuild their economy.

Courtesy Wolf Richter at Wolf Street (Archive Here)  

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