Achilles heel

Greek banks are in suspended animation. The stricken state’s lenders had been waiting for elections on May 6 to deliver not only a new government, but also much-needed details on how they will be recapitalised. Instead, domestic political deadlock means they will have to wait another month for a new election. In the meantime, deposit flight has accelerated. The country’s president revealed that depositors had taken euro 700 million out of the system on Monday alone.

The country’s banks are kept afloat by the promise of a recapitalisation from euro zone/International Monetary Fund (IMF) bailout funds and emergency liquidity assistance (ELA) from their own central bank. But both crutches would be kicked away if Greece pulls out of its bailout programme. Look first at capital. The recent haircut on Greek sovereign debt left huge holes on banks’ balance sheets. The February bailout earmarked euro 48 billion to repair them. Of this, euro 25 billion has already been handed to a Greek government-run pot of money called the Hellenic Financial Stability Fund (HFSF).

If Greece rips up the bailout deal, it will certainly not get the remaining euro 23 billion. What’s less clear is what will happen to the euro 25 billion sitting in the HFSF. The euro zone couldn’t just grab the money back. On the other hand, the HFSF wouldn’t have a free hand to pump it into Greek lenders as the euro zone and IMF oversee the process - and have some rights to cancel the facility in the event of a sovereign default. Expect a messy wrangle.

Now look at liquidity. Since the end of 2009 the sector has lost almost a third of its deposits. The gap has been plugged by borrowing initially from the European Central Bank and, more recently, by getting ELA from the Greek central bank.

Up to now, the ECB has been willing to authorise more ELA by the Greek central bank. But, in the event that Greece ripped up its bailout deal, Frankfurt would presumably put an end to the liquidity assistance too. At that point, the banks would collapse — and the ECB, of course, would be staring at massive losses on euro 127 billion in liquidity already extended to the system.