Experts have been quoted saying the European Central Bank has the most powerful trump card for dealing with the Greek crisis.
The president of the ECB has the option to put Greece in such a position where it would have to print its own currency and leave the Eurozone. However, it is reported this is not a measure he wants to take at the moment.
The effect of the Greek financial crisis has been considerable, customers have been taking their money out of Greece’s commercial banks and private sector banks deposits have declined by €23bn (£16.3bn) since November. This is a very real concern for Greece as the banks might not be able to raise enough new funds for the consumers to take their money out.
The banks continue to reply on the Bank of Greece using an Emergency Liquidity Assistance (ELA) arrangement, which is reported to be in excess of €80bn.
This way the ECB would be able to play its trump card; tell the Bank of Greece to limit payments or stop funding the banks.
The ECB could play the card but the main point of an ELA is its availability for European banks that are solvency and facing temporary liquidity problems. However if the ECB took the view that Greece’s banks were no longer solvent, the ECB could command the Bank of Greece to pull the plug.
Whether they would actually do this is up for debate. An ELA is not to be used to support a bank which is already bust; however this is often not a straightforward matter.
Using Cyprus as an example, we saw the ECB threaten to stop the ELA for the Cypriot banks unless there was an international bailout which could prevent insolvency. The ECB president has said Greece will continue to receive funding as long as it remains solvent and has adequate collateral; yet it is apparent the Greek banks are in great difficulty.
If the ECB were to stop the support measures, the Greek banks would undoubtedly collapse. There would be little choice but to start a new currency and reflate its economy with the help of the Central bank.
The effects of such action could be dramatic, with Greece outside of the Eurozone it could become close allies with other powers such as Russia and China. This would inevitably have considerable political consequences.
The ECB certainly does not relish the power it holds over the ability to redraw the European map.