BREAKINGVIEWS-Greek banks' twin crutches are rickety

Wed May 16, 2012 10:26am BST

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay

LONDON, May 16 (Reuters Breakingviews) - Greek banks are in suspended animation. The stricken state’s lenders had been waiting for elections on May 6 to deliver not only a new government, but also much-needed details on how they will be recapitalised. Instead, domestic political deadlock means they will have to wait another month for a new election. In the meantime, deposit flight has accelerated. The country’s president revealed that depositors had taken 700 million euros out of the system on Monday alone.

The country’s banks are kept afloat by the promise of a recapitalisation from euro zone/IMF bailout funds and emergency liquidity assistance (ELA) from their own central bank. But both crutches would be kicked away if Greece pulls out of its bailout programme.

Look first at capital. The recent haircut on Greek sovereign debt left huge holes on banks’ balance sheets. The February bailout earmarked 48 billion euros to repair them. Of this, 25 billion euros has already been handed to a Greek government-run pot of money called the Hellenic Financial Stability Fund

(HFSF).

If Greece rips up the bailout deal, it will certainly not get the remaining 23 billion euros. What’s less clear is what will happen to the 25 billion euros sitting in the HFSF. The euro zone couldn’t just grab the money back. On the other hand, the HFSF wouldn’t have a free hand to pump it into Greek lenders as the euro zone and IMF oversee the process – and have some rights to cancel the facility in the event of a sovereign default. Expect a messy wrangle.

Now look at liquidity. Since the end of 2009 the sector has lost almost a third of its deposits. The gap has been plugged by borrowing initially from the European Central Bank and, more recently, by getting ELA from the Greek central bank.

Up to now, the ECB has been willing to authorise more ELA by the Greek central bank. But, in the event that Greece ripped up its bailout deal, Frankfurt would presumably put an end to the liquidity assistance too. At that point, the banks would collapse – and the ECB, of course, would be staring at massive losses on 127 billion euros in liquidity already extended to the system.

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CONTEXT NEWS

- Greeks withdrew 700 million euros from their banks on May 14, according to Greece's President Karolos Papoulias.

- Papoulias told the country's political leaders that its banks were currently very weak, in a transcript released on May 15.

- Reuters: Concerned about a euro exit, Greeks pull funds from banks [ID:nL5E8GG0S1] - For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Hugo Dixon and David Evans)

((george.hay@thomsonreuters.com)) Keywords: BREAKINGVIEWS GREECE/BANKS

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