Azernews.Az

By Bloomberg

The European Central Bank may choose to buy time for politicians to discuss the referendum that has left Greece’s finances hanging by a thread.

While the Governing Council is due to talk on Monday on whether to keep supporting the country’s crippled lenders, it’ll probably be reluctant to preempt a planned meeting of euro-area leaders. German Chancellor Angela Merkel and French President Francois Hollande will meet late Monday, and European Union President Donald Tusk called a euro-area summit for Tuesday.

A popular vote to reject the terms of an EU-led bailout has left Greece on the verge of running out of money, trapping the ECB between the moral hazard of funding a system close to bankruptcy and the dramatic consequences of shutting it off. Given the risk of splintering the euro, ECB President Mario Draghi and his colleagues have so far signaled they’ll take their lead from elected representatives.

“It is clear that the ECB has no appetite to front-run the political process,” Michala Marcussen, global head of economics at Societe Generale SA in London, said in a note on Sunday. “As long as discussions are ongoing between the Greek administration and the euro area, we consider it unlikely that the ECB would fully cut the Emergency Liquidity Assistance and Greek banks’ access to ECB liquidity facilities.”

Merkel, Hollande

An ECB spokesman declined to comment on the Governing Council’s plans. Tusk convened a call on Monday morning with Draghi, European Commission President Jean-Claude Juncker and Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, to prepare Tuesday’s summit.

Merkel and Hollande, who will meet Monday at 6:30 p.m. in Paris, said the decision of the Greek people is to be respected. The Euro Working Group will discuss Greece the same day, while euro-area finance ministers expect the country to present new proposals at a meeting starting at 1 p.m. Tuesday.

Prime Minister Alexis Tsipras said after the vote that Greece will return to the negotiating table on Monday. He’ll be without Yanis Varoufakis, who quit his post as finance minister on Monday, saying his presence could hamper aid talks. Varoufakis told Bloomberg last week that the nation’s banks, shut and under capital controls for the past week, will open on July 7.

Stability Risks

As politicians take the time to settle into their negotiating positions, the ECB is watching the financial- stability risks. The euro was down 0.5 percent at $1.1056 at 11:49 a.m. Frankfurt time. While European equity markets fell, volatility subsided on speculation Varoufakis’s resignation will smooth further talks.

“The contagion risk is actually fairly manageable,” Moritz Kraemer, managing director of sovereign ratings at Standard & Poor’s, said in an interview on Bloomberg Television’s “The Pulse” with Manus Cranny.

The ECB claims it has the policy tools available, and the capacity to develop new ones, to tackle financial turbulence in the currency bloc and elsewhere. As well as potential adjustments to its established asset-purchase programs, the ECB has international currency swap lines in place and has made backstops available for non-euro countries in eastern Europe.

“In the current circumstances of great uncertainty in Europe and the world, the ECB has been clear that if we need to do more we will do more,” Executive Board member Benoit Coeure said in Aix-en-Provence, France, on Sunday. “Our will to act in this matter should not be doubted.”

Shut Off

The extent to which the will to do more extends to Greece is what will dominate the Governing Council’s discussions on Monday. Shut off from international markets and ruled out of the ECB’s bond-buying programs, Greek banks have for the past five months relied on Emergency Liquidity Assistance from their own central bank, with the ECB’s approval. Now that aid is also close to running out.

Unless the 88.6 billion-euro ($97.5 billion) ceiling on ELA is increased, lenders may have to restrict cash withdrawals further. Yet with no bailout deal on the table that could rescue Greece’s finances, ECB policy makers can’t ignore their duty to protect the Eurosystem.

“The first thing we want to know is whether there will be an extension of ELA; that’s absolutely critical,” said Paul McNamara, an investment manager at GAM UK Ltd. in London. “What happens to Greece is still in the balance.”

For the Governing Council, the urgency is intensified by another looming deadline. On July 20, Greece is due to pay 3.5 billion euros back to the ECB as bonds bought under an earlier crisis rescue mature.

That’s the “most important” date, Governing Council member Ewald Nowotny said on June 30. Bound by European law that forbids the financing of governments by central banks, the ECB couldn’t consent to a non-payment and may be compelled to take drastic steps if it happens.

“There is a practical mechanism to trigger exit, namely the withdrawal of ELA,” Deutsche Bank AG economists Mark Wall and Marco Stringa said in a note. “The exit of a member state would be seen as the most significant crisis for the single currency to date.”