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Uncertainty in view of Greece deadline

Andrea Rönsberg, BrusselsJune 30, 2015

With the Greek bailout program about to end, efforts are underway to reach an agreement that would unlock remaining funds. Without a deal, the EU finds itself in uncharted territory.

Greek goddess Athena against a dark sky
Image: Getty Images/AFP/A. Messinis

The clock is ticking down the hours, minutes and seconds until midnight on June 30, when Greece will lose access to the remaining 7.2 billion euros ($8 billion) in funds available under the current bailout program.

Greek Finance Minister Yanis Varoufakis already announced Greece would not meet the deadline to pay back debt of 1.6 billion euros ($1.9 billion) to the International Monetary Fund (IMF). That would make Greece the first developed economy to default on IMF loans.

Yet, despite this apparently harrowing scenario, Diego Valiante of the Center for European Policy Studies in Brussels is certain that "absolutely nothing" will happen.

"From a financial standpoint, the situation is still safe," he says.

Further emergency assistance from ECB forthcoming

Valiante is confident that the European Central Bank (ECB) will decide to continue to help Greek banks at a meeting on Wednesday.

The ECB has been providing Greek banks with so-called emergency liquidity assistance, or ELA, since February.

Following the breakdown of negotiations among the eurozone's financial ministers on Saturday, the ECB on Sunday decided to keep this emergency cash to Greek banks at its current level of 89 billion euros.

Jeroen Dijsselbloem, Eurogroup president
Surprised by the referendum: Jeroen Dijsselbloem, who presides over the eurozone's finance ministersImage: Reuters/Y. Herman

Without this emergency assistance, the Greek banks would have no access to fresh money because the ECB has not been accepting Greek government bonds as collateral for lending to commercial banks since February.

IMF loan 'irrelevant' to ECB emergency assistance

But Valiante says whether or not Greece pays back the IMF on time has no consequences for emergency assistance coming from the ECB. Europe's central bank, he stresses, could terminate this assistance only if its supervisory board determined Greek banks to be insolvent.

"The termination of ELA cannot happen as a result of an assessment of default of the country," says Valiante, adding: "Only if, at some point, the supervisory body of the ECB determines that Greek banks are not solvent anymore could the bank's governing council terminate ELA."

That situation, says Valiante, could arise if Greece fails to pay back parts of the debt held by the ECB – an assessment shared by the Financial Times' Brussels correspondent Peter Spiegel.

'Capital controls may last years'

Valiante is sure Greek banks have "more than a month of liquidity," even if the ECB decides against increasing emergency cash on Wednesday. That is under the condition that if and when Greek banks open again after the referendum planned for July 5, capital controls introduced by the Greek government will stay in place.

Greek Prime Minister Alexis Tsipras introduced capital controls on Sunday, limiting ATM cash withdrawals for Greek debit card holders to 60 euros per day, as well as imposing a bank holiday until July 7.

Greek prime minister Tsipras giving a tv interview
Greek Prime Minister Alexis Tsipras explains his decisions to the mediaImage: picture-alliance/AP Photo/T, Stavrakis

"Once you introduce capital controls, the credibility is gone," says Valiante, "so capital controls will be there maybe even for years."

This was the case with Cyprus, where capital controls introduced in spring 2013 remained in place until April of this year.

Discussion about euro exit

Financially speaking, says Valiante, with capital controls in place at current levels and continued emergency cash from the ECB, there is still time to find a solution to the Greek crisis.

At the political level, the specter of a possible Greek exit from Europe's common currency arose after EU leaders warned Greek voters on Monday that a 'no' in the referendum would mean a 'no' to the eurozone and the EU.

Legally, however, there are no provisions in EU treaties for a eurozone member to leave the currency union.

Greek Finance Minister Yanis Varoufakis also made this point, saying that Greece would consider an injunction with the European Court of Justice should it be forced to leave the euro.

"The Greek government is right in saying there is no way to get us out of the eurozone," says Stefan Gehrold, who heads the Konrad Adenauer Foundation in Brussels.

He adds that for him, the more pressing question is whether a Greek default is possible while Greece remains a member of the eurozone. "We've had similar events in the past when US state governments defaulted while continuing to be in the same currency zone," he says, "so I think it is possible to keep Greece in the eurozone."