By Mehreen Khan 19 June 2015
ECB increases tap on emergency funding as prospect of capital controls and bank closures beckon before Monday's emergency summit
Greece's banking system was saved from a weekend collapse after the European Central Bank was forced to pump emergency rescue funds and halt the immediate threat of capital controls.
The ECB took the unusual move to raise its emergency liquidity assistance (ELA) twice in the space of three days as a further €1.2bn fled the financial system on Friday. The ceiling on ELA was reportedly raised by €1.8bn according to reports, and came following a request from the Bank of Greece.
The Frankfurt-based central bank took the drastic action after its officials warned European finance ministers that Greece's banks may not be open for business on Monday. Total deposit flight has now soared to €4.2bn this week as full-blown panic over the country's Eurozone future has set in.
ELA funding is one of the last critical links keeping Greece in the single currency.
Without the funds, Greece would likely find itself in the midst of a bank run, forcing the Leftist government to impose draconian capital controls to prop up the banking system. Such measures, which include deposit withdrawal limits, were last seen in the Eurozone in 2013 in Cyprus after the ECB had threatened to cut the life support for Nicosia's financial system.
The drip feed of cash will now be reviewed by the ECB's governing council on Monday, when EU leaders and finance ministers will convene for a last ditch attempt to thrash out their differences with Athens.
Donald Tusk, the man chairing summit, confirmed that Athens would be delivered an ultimatum deal as the country's future reached a "critical" point.
"We are close to the point where the Greek government will have to choose to accept what I believe is a good offer for support, or to head towards default," said Mr Tusk.
"The game of chicken needs to end, and so does the blame game. There is no time for more games."
He added the meeting would not produce a final resolution to the country's five-month negotiating impasse, with any ultimate decision remaining with the Eurozone's finance ministers.
"There is time, but only a few days. Let us use them wisely," said Mr Tusk.
Earlier this week, ECB president Mario Draghi said there was no ceiling on the liquidity assistance available for the Greek financial system as long as Athens remains in a bail-out programme and banks remained solvent.
This resolve is likely to be tested in the coming days as Greece's rescue programme expires on June 30 and the country hurtles towards a default on its international creditors.
However, Friday's reprieve was evidence the ECB was not yet "willing to pull the trigger on Greece", said Carsten Brzeski of ING.
"It would have been possible for the ECB to blackmail Greece into capital controls, but we're not there yet. Mario Draghi is not yet willing to take a political decision."
Greek bank stocks rallied by 4pc on the news.
Even if the ECB does not decide to pull the plug on ELA at the end of the month, the institution still has the tools to push Greece towards capital controls, warned Francois Cabau of Barclays.
One such tool in the ECB's armoury is a tightening of the collateral rules it imposes on the banks in return for the emergency cash.
"If no progress is made before the end of the month, we would expect that from July the ECB would increase the haircut sufficiently to force Greek authorities to impose capital controls in order to avoid meltdown in the Greek banking system," said Mr Cabau.
Greece's creditor partners rounded on the country as another the round of talks collapsed in acrimony on Thursday. IMF chief Christine Lagarde warned that the Fund would dispense with its usual protocol in the event of non-payment, and revoke the 30-day grace period that is afforded to debtor country which misses its payment.
Head of the Eurozone's bail-out fund Klaus Regling also warned that the his institution could force immediate repayment of all its outstanding debts on July 1 if Greece fails to make its dues. The European Financial Stability Fund is Greece's largest creditor, owning 40pc of Greek debt worth €131bn.
Uncertainty over the country's future has also seen tax revenues collapse. The level of unpaid taxes rose to a €1bn in May, taking the total outstanding tax bill to more than €5bn so far this year.
Chancellor George Osborne said on Friday negotiators were now "preparing for the worst".
Slovakia's finance minister Peter Kazimir took to Twitter to warn there were just 72 hours to prevent a fatal Greek "accident".
"What has to come in the coming 72 hours is Sisyphean task on both sides to prevent ' accident'. Athens needs to move now," he tweeted.
The #Greece window is closing here, and it's closing quite rapidly.