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Sunday, June 28, 2015

Alas Ellas loses ELA

Breaking news The European Central Bank announced an end to Emergency Liquidity Assistance to Greece.

This would have been the Troika's enforcement mechanism punishing Greek default, but Greece hasn't even defaulted yet.

update: never mind maybe given Reuters V BBC clash of the titans

ECB considering increasing haircut on security offered by Greek banks for ELA while keeping assistance - Reuters

Also @Frances_Coppola With anything from EU sources, unless the source is named you should not believe it.

end update update 2: Robert @Peston provided a link to the ECB press release. I don't entirely understand what sticking to the June 26 ceiling implies. Robert Peston explains

The European Central Bank is expected to end emergency lending to Greece's banks on Sunday, the BBC understands.

The country's banks depend on the ECB's Emergency Liquidity Assistance (ELA). Its governing council is meeting later. Greece will probably have to "announce a bank holiday on Monday, pending the introduction of capital controls", a source told the BBC's Robert Peston.

The bailout for heavily indebted Greece expires on Tuesday and talks have broken down. Greek banks would find themselves in serious straits as soon as Monday if the ECB went ahead and cut the lifeline, the BBC economics editor says.

Capital controls are restrictions on how much customers can withdraw from banks. Until now, the Greek government has signalled that it does not want to impose such controls.

In recent weeks, Greeks have withdrawn billions of euros from banks, and long queues formed at cashpoints on Saturday, amid fears that banks would not open on Monday.

The ECB has been sending emergency funds on a daily basis to the Greek central bank, which then allocates it to the high-street banks.

This is the way in which Grepudiation of debt would lead to Grexit. Greek banks can't operate using Euros if the Greek central bank runs out of Euros. The Greek Central Bank can't call cyber-Euros from the vasty deep (Tartaros) but must ask for them to be sent from Frankfurt.

I guess it is theoretically possible for Greek banks to operate without a lender of last resort (such things were done for decades in my native USA). It would be necessary for Greek depositors to trust that things will work out. This hope is chimerical and as likely as a flying horse. Given Greeks' rational total lack of confidence in Greek banks, the banks need a lender of last resort with unlimited resources. I think that means the Greek central bank must control a fiat currency, that is, Greece must leave the Euro. I think that, without ELA, the only alternative would be to abandone banking and conduct all transactions in cash with paper Euro notes.

I think that if ELA is not reintroduced (say if Greece concedes entirely to the Troika demands) then it will be necessary to convert Euro denominated assets (including checking account balances) into Drachma denominated assets using some exchange rate. Also whatever this rate is, a Euro will immediately cost more Drachmas on the market. This means that it is wise for Greeks to take all the money they can out of banks and hold it as cash. This means that the Greek banking system can't survive function using Euros.

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