The ECB thinks Greece will need a bank holiday

Greece flag helping hand

REUTERS/Yannis Behrakis

Greece still can't get a bailout deal.

It looks like we're headed for a bank holiday in Greece.

A report from Bloomberg on Sunday said the European Central Bank believes Greece will need to impose a bank holiday in order to stop massive outflows from Greece's banking system.

Bloomberg's Angela Cullen cited a personal familiar with the ECB's thinking on his report
A bank holiday involves closing banks thereby limiting the ability for funds to be withdrawn. It is typically implemented to avoid a bank run.

The report out of Bloomberg follows an announcement from the ECB that it would maintain its emergency liquidity assistance - or ELA - to Greece at current levels. And so while the ECB is keeping its ELA program in place, the Financial Times notes that without an increase in the ELA, Greece will likely run out of cash before July 5.

The ELA was first put in place back in February, and the amount available under the program has been steadily increased over the last few months. The program allowed Greek banks to post collateral other than Greek government debt - which the ECB said it would no longer accept - in exchange for receiving liquidity at elevated interest rates. Bloomberg notes that the ECB is currently limiting the amount of capital available under the ELA at around €89 billion.

Another alternative to a bank holiday is implementing capital controls, though these are tougher to repeal once put in place - Cyprus, for example, had capital controls put in place in 2013 and these conditions were just lifted in April - and capital controls is often seen as a last ditch effort to stem the rush of money from a banking system.

We earlier reported that analysts at Morgan Stanley see the scenario of capital controls as "highly likely." However, the first rule of capital controls is that you don't talk about them.
Greek bank line

REUTERS/Alexandros Avramidis

People line up to withdraw cash from a National Bank ATM in Thessaloniki, Greece June 27, 2015. Greek Prime Minister Alexis Tsipras called a referendum on austerity demands from foreign creditors on Saturday, rejecting an "ultimatum" from lenders and putting a deal that could determine Greece's future in Europe to a risky popular vote.

And so "bank holiday," which is a closure of banks that can be implemented and later lifted much more easily than capital controls is almost certainly the preferable option in Greece, if only a temporary one.

In its announcement, the ECB said, "The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area. The Governing Council is determined to use all the instruments available within its mandate."

The ECB added: "The Governing Council stands ready to reconsider its decision."

And so as is, has been, and remains the case in Greece right now, this is subject to change.

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