The ECB is ready to pull the plug on Greek banks if there is no agreement in the critical EU Summit on Sunday. Christian Noyer, the governor of France’s central bank, said that if there is no deal, the consequences will be grave with a collapse of the Greek economy and chaos.
Without the Emergency Liquidity Assistance (ELA), Greek banks will go bust. Without banks, new money will have to be created – an exit from the euro-zone. But will it really go ahead? If one country leaves, others could follow, and the ECB itself could shut down.
The ECB has already forced capital controls after Greece went for a referendum. This didn’t prevent Greeks from rejecting the creditors’ proposal.
There is no legal framework for kicking a country out of the euro-zone, but the ECB, which in theory is not political, has the power to do so by choking the country’s banking system.
But apart from endangering its own existence, such a decision by the ECB could have immediate implications. Another ECB member, Germany’s Jens Weidmann, warned Merkel that a Grexit would cause serious damage to the German budget. The profits of Germany’s central bank, the Bundesbank, go into the German budget.
Will Weidmann hurt his own country’s finances?
67% of Germans and 85% of French already acknowledge that money lent to Greece is lost, according to a recent poll. By triggering a Grexit, more money will be lost as Greece will have an even harder time to pay the money back due to the re-denomination. A new drachma will be significantly weaker than the euro.
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