ECB to decide on Greek funding Monday

The euro fell in early trading on Asian markets at the start of an expected period of market volatility in response to the Greek referendum result.

Asian stocks hit a six month low, with the Japanese Nikkei index dropping by 2.4 percent. European stock markets are expected to fall by a similar level over the course of Monday’s trading.

With eurozone politicians not meeting until Tuesday (6 July), attention will switch to Frankfurt, where the European Central Bank’s governing council will meet on Monday to decide its next move.

The ECB’s decision last Sunday not to raise the ceiling of its emergency liquidity assistance (ELA) programme to Greek banks from €89 billion led to the introduction of limits on cash withdrawals.

The Greek government faces its next big repayment on 20 July, when it must redeem €4.2 billion of ECB bonds. Failure to meet this payment would almost certainly result in the ECB halting its ELA programme, bankrupting the country’s banking sector.

But without further financial support over the next two weeks there is little chance of its banks being able to survive that long. In the absence of the ECB pumping new money into the Greek system, market analysts believe that Greece would soon be forced to introduce a parallel currency.

The ELA programme requires the ECB to deem that Greek banks are still solvent. However, after a week of capital controls, and no extra money coming into the system, the Greek banking sector is within days, or even hours, of running out of cash to stock its cash machines.

“The ECB will not be the one pulling the trigger on Greece,” says ING chief economist Carsten Brzeski, adding that “as long as eurozone politicians will signal their willingness to negotiate with Athens, the ECB will maintan ELA at its current levels.”

Meanwhile, in a note reacting to the referendum result, Barclays stated that it “would expect (the) ECB’s (governing council) to shut down ELA at the latest by 20 July”.

Barclays estimates that Greek banks have around €28 billion of collateral that could be posted to the ECB in return for ELA funding.

The market uncertainty is also expected to hit other southern Mediterranean countries, particularly the sovereign bond spreads of Italy and Spain, with investors expected to flock towards so-called safe haven bonds such as Germany and the US.

Greek banks have faced a steady flight of capital since January. The ECB has pumped in around €120 billion - equivalent to over two thirds of the Greek economy- making it one of the institutions most exposed to a Greek default.