Greece’s approval of a bailout deal overnight could persuade the European Central Bank to ease its funding squeeze on Athens as soon as Thursday, the first step in reopening banks and returning some normality to its stricken economy.
Making a symbolic gesture, the bank could increase Emergency Liquidity Assistance (ELA) when its Governing Council meets, helping to restore confidence after Greece was nearly forced from the euro — a debate that challenged ECB President Mario Draghi’s pledge that the currency was irreversible.
But the funding increase is far from certain and would be modest in any case, likely limiting banking operations. Cash withdrawals are expected to stay limited at least until a bailout package is passed and banks receive at least some of the 25 billion euros earmarked for recapitalization.
People with knowledge of the matter said more emergency funding depended on the Greek parliament’s approval of the reform deal and a 7 billion euro temporary “bridge” finance facility from Europe, ensuring that Greece would make its 3.5 billion euro plus interest payment to the ECB on July 20.
Both are set to be in place by the time the ECB wraps up the meeting but just barely, raising the risk of a delay.
ELA has been held steady since late June, forcing banks to close and limiting cash withdrawals to 60 euros per day, disrupting an economy already in recession. It has shrunk by a quarter since the start of the country’s troubles.
Officials still expect banks to limit withdrawals even after they open.
Germany’s finance ministry, where Wolfgang Schaeuble suggested a temporary exit from the euro for Greece, raised the idea on Wednesday that Athens could meet short term domestic obligations with IOUs, a step many believe amounts to the same thing.
Still, a limited bank opening would create the impression of normality and allow the Greek central bank to release cash that one official said was now held in its vaults for an emergency, via the banks into the economy.
Nearly a third of economists polled by Reuters still expect Greece to eventually leave the euro and the International Monetary Fund said Athens needs far more debt relief than European governments have been willing to contemplate.
Though Germany ruled out a ‘haircut’ to this debt mountain, it said extending maturities was an option and the European Commission suggested ‘very substantial re-profiling’. The IMF said Greece may need a 30-year grace period on servicing all its European debt, including new loans, and a dramatic maturity extension.
“Were it not for Greece, the ECB would be enjoying a gradual, domestically-driven, QE-boosted Eurozone recovery while keeping a cautiously optimistic tone at its regular policy meeting on Thursday,” Credit Agricole said in a note.
Indeed, lending data indicate that growth is gaining momentum with both business and household lending expected to increase in the third quarter, boosting growth and suggesting that the ECB’s 60-billion-euro per month asset buying scheme was feeding through to the economy.
With risks ahead, the bank is expected to reaffirm its commitment to quantitative easing at least until September 2016 with the possibility of increasing the scheme.
Chinese market volatility will likely cause concern while commodity prices could lower inflation.