Greece is on the brink. Prime Minister Alexis Tsipras has until Thursday to come up with a new deal to save his country: On Sunday, European leaders will decide whether to give Greece a new bailout or abandon the country to financial chaos and Grexit.
But in many ways, it is too late already. Greece effectively introduced a parallel currency when it closed the banks and imposed capital controls on June 29. Euros held in Greek accounts are worth less than euros held at non-Greek banks simply because they’re not as accessible.
Daily cash withdrawals have been limited to €60 per person and money transfers abroad now require special permission. These curbs are necessary to prevent Greek deposit holders from clearing out their accounts for fear of an exit from the euro zone and a move to a new, weaker currency.
Even if Greece reaches a bailout deal, the question remains: how much longer will the banks have sufficient capital to keep functioning? After all, more than a third of the lending on their books has gone bad, and that proportion is increasing.
According to European agreements on bank rescues, creditors must be tapped first before public money is used.
Danièle Nouy, president of the banking supervisory authority at the European Central Bank, said a month ago: “The Greek banks are solvent and liquid.”
But many people are finding that hard to believe, especially Greek depositors who can’t get hold of their money right now. They’re de facto creditors of the banks, and they could lose a share of their money regardless of the outcome of the crisis talks.
If no credible deal is reached in the coming days, the banks will inevitably run out of cash. The Greek government may then be forced to introduce its own currency which it could print and use to recapitalize the banks. The deposits held by Greek savers would probably be converted to this new currency and be worth significantly less than their euros were.
Under E.U. rules, deposits up to at least €100,000 per depositor must be protected from bank insolvencies. But banking sources said the Greek deposit insurance fund only contains €3 billion, not nearly enough to protect savers if the banks collapse.
The government doesn’t have the funds to bail out the banks either, unless it gets another loan from international institutions.
According to European agreements on bank rescues, creditors must be tapped first before public money is used. Professor Andre Spicer of the Cass Business School in London said that would likely happen in Greece’s case, just as it happened in the Cypriot financial crisis in 2013. He said such a move would send a disastrous signal to bank customers in other peripheral euro-zone countries like Spain or Portugal. At the first sign of trouble in their financial system, they would try to withdraw their money.
The head of the European Banking Authority, Andrea Euria has denied plans that depositors with less than €100,000 may be required to forfeit some of their money.
This very nearly happened in the Cypriot crisis two years ago — before the government changed its mind at the last minute to preserve the credibility of the European deposit insurance scheme. Savers in Greece can only hope their money in the bank will stay right there until they can access it again.
Norbert Häring is an editor with Handelsblatt, focusing on monetary policy and financial markets. To contact the author: email@example.com