The Greek crisis has an air of the endgame about it. Euro zone finance ministers failed on June 18 to strike agreement on a new bailout. International Monetary Fund boss Christine Lagarde and European Central Bank board member Benoit Coeure have made discouraging comments. In the gloom, it may look like the denouement will come at next Monday's hastily arranged emergency summit of euro zone leaders.
But the real point of no return probably comes later, because the most likely trigger for Greek entry into financial no man's land is neither the failure to repay official creditors nor the imposition of capital controls, should the latter become a necessity as Greek deposits fly out of the sector. Disaster comes whenever the ECB stops approving the so-called emergency liquidity assistance which is keeping Greek banks afloat.
When does that happen? Coeure said Greek banks might struggle to open on June 22. And Lagarde said that Greece would not be entitled to a grace period if it fails to repay her organisation euro 1.6 billion on June 30. Strictly speaking, that might mean the Greek government debt which is used as collateral for ELA would no longer qualify.
But the majority of the ECB's governing board wants the politicians to fail firmly and finally before the central bank acts. It has ways to delay. Capital controls could be kept away by allowing the Greek banks to create more government-guaranteed debt as collateral. With or without limits on withdrawals, the ECB can take a broad definition of default, deciding that IMF arrears do not affect the status of the government bonds held by the banks. And it will take months of high losses before accountants formally declare any banks to be insolvent.
On July 20, though, Greece is supposed to repay euro 3.5 billion to the ECB itself. If the government fails to pay, ELA would look crazy, since the ECB would then be approving collateral guaranteed by a state that had not paid it. Governments all over the euro zone would join ECB hawks in demanding action. Any remaining doves would probably have to fold their wings. Four weeks from Monday is the day to watch.
