E.C.B. Doubts Add to Uncertainties on Greek Debt Lifeline

By JACK EWING and LIZ ALDERMANMAY 6, 2015

The New York Times

FRANKFURT — As Greece mounts an 11th-hour diplomatic offensive across Europe to secure financial aid that it desperately needs to avoid a default, patience with Athens is wearing thin at the European Central Bank.

That could pose big problems for Greece, since the central bank is the country’s biggest creditor and a necessary source of financial support for struggling Greek commercial banks.

A majority of the members of the European Central Bank’s influential Governing Council are increasingly uncomfortable with the central bank’s growing financial exposure to Greece, according to people with knowledge of the group’s discussions. Members worry that the council has already stretched rules to extend additional help to the banks, whose financial health has been in serious decline because of Greece’s deep economic downturn.

The European Central Bank has already lent about 110 billion euros, or about $120 billion, to banks in Greece — more than to any other country’s financial institutions, relative to the size of the economy. The banks need the cash to continue providing credit to the Greek economy.

And while the central bank does not want to provoke a mass failure of Greek banks, or force Greece out of the eurozone, it may soon be compelled to tighten its flow of credit to the banks if Greece does not produce a set of economic overhauls that its creditors are demanding.

Any significant economic changes are proving difficult for the government of Prime Minister Alexis Tsipras, which was voted into power in January on promises to relieve Greece of the austerity measures demanded by its foreign lenders.

On Wednesday, the central bank’s Governing Council met in Frankfurt but did not impose any new restrictions on Greece. Instead, the council was planning to closely watch the outcome of a meeting in Brussels on Monday between Greece and the Eurogroup of finance ministers from eurozone countries. As it has been doing routinely for several months, the central bank again raised the limit on emergency cash for Greek banks.

Policy makers there will decide whether Greece has come up with an adequate set of economic overhauls required before they will release more financial aid to the country, which is quickly running out of money.

On Wednesday, Greece found funds to make a €200 million payment to another of its creditors, the International Monetary Fund. But on Tuesday, Greece must give the I.M.F. an additional payment of about €750 million — money that the Tsipras government says it will be hard-pressed to find.

More than two months have passed since European leaders in late February negotiated a deal to extend Greece’s €240 billion bailout program and to unlock an additional €7.2 billion from that program. Even if Greece can meet next week’s I.M.F. repayment, the country desperately needs the additional funds to avoid defaulting on billions of euros in other debt payments that are due in coming weeks.

The financial and political implications of a potential Greek default or the country’s forced or voluntary exit from the euro currency union are hard to predict.

Since that February deal, the stalemate and rancor between Greece and its creditors have deepened, and creditors have repeatedly withheld additional aid until Greece provides a list of measures to increase tax revenue, contain spending and overhaul the economy that they find satisfactory. In addition to the central bank and the I.M.F., Greece’s other big creditor is the rest of the eurozone.

Should that stalemate continue after Monday’s meeting of Eurogroup finance ministers, the European Central Bank, whose credit program with Greek banks also hinges on the assessment of Greece’s other creditors, might be compelled to pull back, the people with knowledge of the Governing Council’s discussions said.

“Another negative eurogroup would probably force their hand,” said Lefteris Farmakis, an economist at Nomura in London.

If the central bank curtailed its assistance, Greece’s banks could be forced to take drastic measures, like imposing restrictions on how much money depositors could withdraw. That would send ripples through the economy and fan further uncertainty about whether Greece could remain within the eurozone.

On Tuesday, Greek government officials traveled to various European capitals to meet with leaders and policy makers, intensifying a diplomatic offensive that began this week to seek an accord ahead of Monday’s meeting in Brussels.

The Greek finance minister, Yanis Varoufakis, flew to Rome on Wednesday to meet with his Italian counterpart, and was scheduled to meet with Spain’s finance minister on Friday in Madrid. On Tuesday, Mr. Varoufakis, whose role in the negotiations has been downgraded after bitter personality clashes with other European officials, shuttled between Paris and Athens to meet with the French finance minister and Pierre Moscovici, the Brussels-based European commissioner for economic affairs.

Mr. Tsipras has been busy working the phones, trying to build political support for a deal. On Tuesday night, he spoke to Christine Lagarde, the head of the I.M.F., and Chancellor Angela Merkel of Germany. On Wednesday, he spoke to President François Hollande of France.

Whether the efforts bear fruit remains to be seen. Mr. Moscovici said European policy makers could unblock funding to Greece within a week. But he ruled out Greek requests to write off a portion of the nation’s huge debt until Athens commits to economic overhauls.

Mr. Varoufakis was not optimistic. This week, he said he did not expect a deal on May 11. On Tuesday, the Greek government blamed the I.M.F. and the European Union for the snarl, saying that the creditors themselves were failing to agree on a framework for a deal.

But on Wednesday, the institutions hit back. In an unusual joint statement, the I.M.F., the European Central Bank and the European Commission — the European Union’s administrative arm — said they were not obstructing a deal and shared “the same objective of helping Greece achieve financial stability and growth.”

But domestic politics continue to put pressure on the Greek government to spend more, not less, despite the demands of its creditors.

Late Tuesday, the Parliament passed legislation that paved the way for rehiring more than 3,500 civil servants who had lost their jobs under the previous government, and that abolished a so-called mobility program that had put thousands more at risk of dismissal if they could not find jobs in other parts of the public sector.

Less than a week earlier, Parliament voted to reopen the state broadcaster ERT and rehire more than 1,500 fired workers.

Unless creditors are willing to overlook those moves and agree to more aid, Greece will have trouble making a series of looming debt payments. By mid-July, Greece must pay the I.M.F. nearly €3 billion, and roll over €11 billion worth of short-term debt. From July through August, Greece must also pay the European Central Bank about €6.7 billion on its Greek bond holdings.

On Tuesday, the European Commission sharply cut its forecast for the Greek economy, saying the political chaos in Athens would prevent a recovery and cause the debt to surge further. Economists say Greece, which had only started to recover from a grinding five-year recession, risks a relapse because of the miasma of financial uncertainty.

In turn, Greece has again cast a cloud over the eurozone economy, with the potential to derail a tentative recovery. Many economists say that eurozone growth has accelerated this year but remains vulnerable to shocks.

In recent years, members of the E.C.B.’s Governing Council have often been divided on crucial issues, including how aggressively to stimulate the economy. But people with knowledge of the council’s sentiment say a clear majority is worried about the risk that the central bank has assumed to keep afloat Greek banks, and by extension, the government.

In addition to having lent Greek banks about €110 billion, the central bank owns about €20 billion worth of Greek government bonds.

The central bank does not want to be the institution that forces Greece out of the eurozone. “It is pretty certain the E.C.B. is not going to take it to the end immediately,” Mr. Farmakis of Nomura said.

But the central bank could, for example, impose additional restrictions on the use of Greek bonds as collateral for emergency central bank loans.

Such restrictions would shorten the time before Greek banks run out of bonds or other securities they can use to get low-interest cash from the central bank. Analysts at Nomura estimate that Greek banks as a group can borrow an additional €25 billion to €30 billion before they run out of collateral.

Before they reached that limit, which could cause some banks to fail, the lenders would need to begin restricting the amounts that customers could withdraw or transfer out of the country. Credit, already scarce, would become even more difficult to come by, further choking business investment.

A similar sequence of events played out in Cyprus in 2012. The country survived, aided by an international bailout, but sank into a recession, which continues.

Jack Ewing reported from Frankfurt and Liz Alderman from Paris. Niki Kitsantonis contributed reporting from Athens.