By Mehreen Khan 17 February 2015
The 'sword of Damocles' is hanging over Greece's banks and the impasse with its creditors could now bring it down for good
Greece and its lenders are playing poker over its future in the Eurozone Photo: Reuters
Greece's stand-off with its creditors shows little signs of abating.
After the latest, unpromising round of talks between the new Greek government and the euro's finance ministers, both parties have hardened their negotiating positions in anticipation of yet another showdown, which is now temporarily pencilled in for Friday.
But even before we get to the end of the week, the prospects of a disorderly exit for Greece could be heightened significantly.
On Wednesday, the European Central Bank will have its say on events.
The ECB will be meeting to discuss whether or not it should continue to provide the emergency funds that are helping keep Greece's banks alive.
Related Articles
How central banks lost control of the world 17 Feb 2015
Grexit fears mount as Athens leaders refuse to 'accept psychological blackmail' 17 Feb 2015
Osborne demands ‘Plan B’ as Greek talks falter 17 Feb 2015
Greek crisis talks collapse in acrimony as Syriza defies EMU 16 Feb 2015
This Emergency Liquidity Assistance (ELA) is the last remaining link between the country's lenders and the Eurozone.
For that very reason, ELA now hangs like the "sword of Damocles" over Greek banks, according to Lorcan Roche Kelly of Bloomberg.
The lenders themselves have no control over whether they will remain eligible for this vital source of assistance. It is the politics that will decide that.
Should no extension of a bail-out agreement be reached before Friday, the plug may well be pulled at the end of the month, effectively dumping Greece out of the euro.
Here's how it all could potentially play out:
Why ELA is so important
In a surprise move earlier this month, the ECB said it would stop accepting Greek bonds as collateral for cheap loans. The decision was taken as Mario Draghi and his colleagues thought the prospects of Syriza reaching a new bailout arrangement with its lenders was pretty slim.
But Greece's banks are still being propped up by ELA, which is designed to help banks facing liquidity problems. Lenders will continue to receive the funds as long as Athens remains in some semblance of a bail-out programme.
The main sticking point now emerging between Syriza and the 'Institutions' (formerly known as the Troika), is whether the current deal will be extended after it expires at the end of the month.
This is the preferred option of the Eurozone's leaders, notably Germany. The Greeks however are demanding some form of "bridging" loan which would allow them to keep the country solvent while it negotiates better bail-out terms.
All of this puts the ECB in a bit of a bind. The central bank reviews its ELA decision every two weeks and will do so again on Wednesday. The current hiatus between Syriza and its creditors means any potential extension of the funds into March is looking very unlikely.
In recent weeks, the ECB has had to raise the ELA ceiling available for Greece's lenders to €65bn as deposits have started being withdrawn.
Does this mean there's a run on Greece's banks?
Not yet. Deposit withdrawals have accelerated since the new Greek government was elected at the end of January and amount to around €2bn a week.
If the pace of these outflows continues, Greek banks would eventually run out of money in just over three months, according to calculations from JP Morgan.
But the recent deterioration in talks between the two sides means more people are likely to start withdrawing their money as fears of a Grexit escalate.
The ECB has been here before
During Cyprus's crisis in 2013, the government's rejection of a bail-out deal led to the ECB threatening to withdraw the emergency cash that was propping up its stricken banks.
The ECB also raised the prospect of pulling the plug on Ireland if it did not accept an international bail-out back in 2010.
Can they really pull the trigger?
The rules around ELA are tricky. The ECB officially states that it will continue to provide emergency funding to banks as long as they remain solvent.
In Greece's case, the decision is likely to come down to the state of the bail-out negotiations. Having already banned Greek bonds as collateral, the ECB has shown it is willing to dip its toes into political waters in a bid to get both sides closer to reaching an agreement.
Any decision to withdraw ELA would however require a two-thirds majority in the 23-man governing council.
But the ECB may not even have to resort to such drastic action.
"A more explicit statement around when and how ELA usage would be capped by the ECB would be an additional means of raising the pressure on the Greek government," according to George Saravelos at Deutsche Bank.
It is this kind of signalling that is likely to help tighten the screws on both sides, and the ECB will hope, prompt them into ceding some ground in order to prevent Greece from becoming the first member to leave the euro.
How the European Central Bank could now finally pull the trigger on a Grexit - Telegraph
