By Mehreen Khan 20 May 2015
Moody's warns capital controls are "highly likely" as European Central Bank eases restrictions on emergency cash
ECB left its collateral rules for Greece unchanged
The European Central Bank eased its grip over Greece's banks on Wednesday, after Moody's warned the country would need Cypriot-style capital controls to keep its financial system alive.
Meeting for its weekly discussion on Greek aid, the ECB reportedly loosened its collateral rules for Greek banks which have been propped up emergency cash (ELA) for nearly four months.
The ECB also raised its ELA limit by a further €200m, a much smaller increment than usual, taking total emergency funds to €80.2bn. In total, the moves are set to give the Bank of Greece access to a further €6bn in funding, providing an additional €3bn ELA buffer for lenders. The collateral asset pool is thought to have been expanded to include government-guaranteed bank bonds.
Before Wednesday’s meeting, there were fears the 28-member governing council would tighten its lending restrictions in a bid to hasten talks between Athens and its international creditors over a release of bail-out cash.
But according to reports, the Frankfurt-based ECB refrained from increasing the collateral haircut it demands from banks in return for liquidity support.
The moves came as rating’s agency Moody’s warned there was a now a "high likelihood” Greece would be forced to impose capital controls and deposit freezes to stem the flow of cash leaving the financial system.
An estimated €30bn has been withdrawn from banks since snap elections were called in December 2014.
Capital controls have not been seen in the Eurozone since Cyprus was bailed out by international lenders in 2013. The Greek government could now move to impose a banking transaction tax as it continues its talks with lenders.
Moody’s added the liquidity strain was unlikely to ease over the course of the next 12-18 months, as banks became increasingly reliant on expensive ELA funds.
"Acute funding pressures will persist,” said the report. “We expect dependence on central bank funding to remain high as depositor confidence remains compromised by ongoing uncertainty regarding Greece's support programme and related fears of potential capital controls and an exit from the euro area.”
The rating’s agency calculated ELA funding now accounted for a third of total Greek bank assets, up from only 12pc in September 2014.
President Mario Draghi has come under fire from Athens’ Leftist government for pushing Greece towards the abyss of a euro exit. But Wednesday’s decision indicated the central bank was not willing to pre-empt political negotiations, said Nick Kounis, head of macro research at ABN Amro.
“The ECB is taking a neutral position by gradually continuing to provide liquidity,” said Mr Kounis. “They rightly do not have the stomach to make a Grexit decision.”
However, Greece’s banking system is likely to stay solvent longer than the government, whose coffers are set to run dry by the end of the month.
Lenders meanwhile have enough funds to remain afloat for at least another two months, according to BNP Paribas.
“The government will run out of cash before the Greeks banks,” added Mr Kounis.
Hard Left elements in the government revived default threats on Wednesday, saying the government had no money to meet a €300m loan repayment to the IMF on June 5.
Syriza's parliamentary leader Nikos Filis warned the country was approaching the “moment of truth” with its creditors, prompting the euro to fall as much as 3pc against the dollar to $1.107.
Athens’ continued show of defiance came as hundreds of pensioners and healthcare workers marched through the streets of the capital to protest against Troika demands to cut social security payments for the public sector.
Syriza spokesman Thanassis Petrakos called for a deliberate default on Greece’s official lenders, saying the government would be able to cope with the consequences of a credit event.
Greek pensioners shout slogans during a demonstration for better healthcare in Athens (Reuters)
Greek prime minister Alexis Tsipras and German chancellor Angela Merkel are due to meet at the sidelines of an informal meeting of EU leaders in Riga on Thursday. Mr Tsipras has long seen the German premier as his country’s best hope for a negotiated settlement of Greece’s euro future.
But in a sign that Athens was refusing to capitulate to creditor demands, Brussels economics chief Pierre Moscovici said "big gaps" remained on the thorny issues of pensions and labour market reforms.
Mr Moscovici added that talks were progressing at a faster pace than over the last three months, but there remained "no plan B, Greece must say in the euro".