European Central Bank seen holding emergency funding for Greek lenders stable

The collapsing economy has created an expanding pile of bad debts that have further burned through Greek banks fragile capital cushion.

Many in Athens hope a newfound willingness to reform and a resumption of debt payments to the worldwide Monetary Fund, will help fix country’s battered reputation in Frankfurt, home to the European Central Bank. The decision may depend on whether officials believe Greek Prime Minister Alexis Tsipras can pass legislation enacting economic reforms by Wednesday.

In a report presented to its board of directors last Friday, the US Federal Reserve estimates the recapitalization needs of the four systemic Greek banks at between 24 and 31 billion euros.

However, given that the situation in Greece is “not rosy” and that the economy has sustained severe damage, the Fed report notes that it is “reasonable” to assume that their regulator – the ECB – will ask for a higher capital ratio of 12 percent, as it did in the case of Bank of Cyprus.

According to the ECB’s quarterly bank lending survey, the net percentage of banks reporting an easing in loan standards was -3 per cent in the second quarter. The figures were calculated from a survey of 142 banks in the eurozone that was conducted between June 9 and June 24, a period when tensions between Greece and its creditors was escalating but before they reached a boiling point after Athens called for a referendum on the bailout that was held on July 5.

“Not providing any liquidity at all would seem extreme”, one Greek banker said.

“It gives them the opportunity to keep up the emergency liquidity assistance”, he said. “They will certainly need to be recapitalised”.

Even with an increase in liquidity, capital controls would only be lifted gradually, another official said.

Eurozone leaders agreed a conditional deal on Monday to provide up to 86 billion euros (about $89 billion) of financing for Greece over three years.

As European Commission Vice President Valdis Dombrovskis noted on Sunday, “discussions continue, but all signs point to the ECB providing security to Greek banks for the coming days and weeks”. In such circumstances, there would be little that Athens could do to prevent this.

Greek bankers say that reducing the number of lenders would raise competition issues.