Greek Prime Minister Alexis Tsipras's stunning referendum victory may come at the cost of the country's banks.
The No result in Sunday's vote, signalling rejection of the creditors' loans-for-austerity demands, was the nightmare scenario for the banks, whose leaders and shareholders had been lobbying hard for a Yes vote – acceptance of the creditors' demands.
The governor of the Bank of Greece, Yannis Stournaras, was to call Mario Draghi Sunday evening to try to convince the ECB president to pump more emergency loans into the Greek banks. The ECB's governing council is to meet in Frankfurt on Monday to decide if the banks will get that assistance.
If more emergency loans are to come, they would have to come fast.
The Greek government stated last week that the banks would reopen by Tuesday. But that promise might have to be broken if more emergency loans fail to appear. As of early last week, there was only about €1.5-billion ($2.1-billion) remaining in the ECB's emergency loan assistance (ELA) program. The steady outflow of deposits, slowed somewhat by the capital controls imposed on the banks a week ago, is thought to have reduced that amount to about €500-million by the weekend, meaning the banks are close to being bled dry.
Economists and strategists on Sunday night said the No victory will close more doors than it opens, since the creditors – the ECB, the European Union and the International Monetary Fund – had hoped for a Yes vote.
"Everyone [in Greece] is praying the ECB will increase the ELA cap for the Greek banks [Monday]," Megan Greene, chief economist for Canada's Manulife Financial Corp., said in a note Sunday night written from Athens. "I think this is extremely unlikely. Why would the ECB increase its exposure to Greece when the government, now backed by a majority of the people, is rejecting a bailout plan that was lighter than the one Greece will ultimately need?"
Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, also thought the ECB would be unwilling to pump more emergency loans into the Greek banks. "A No vote accelerates the drift toward Grexit," he said, referring to the shorthand for Greece's exit from the euro zone, "and makes it agonizingly difficult to maintain ELA. If the ECB keeps the banks afloat even after a No vote, then its credibility will be seriously called into question."
The ECB alone can make or break the Greek banks, and the Greek economy along with them.
The ECB launched its ELA program for the Greek banks in February, a month after the election of Mr. Tsipras's radical left, anti-austerity party. His victory spooked depositors, who began yanking their cash from Greece's four main commercial banks. The deposit run came as a blow to the banks, which had been restructured and recapitalized after taking severe losses during the height of the debt crisis in 2011 and 2012.
Since February, the ELA program has made €89-billion available to the banks. A week ago, the ECB capped ELA at that amount instead of boosting it, as the banks had hoped. Fearing the banks would run out of cash, the Greek government then ordered the banks to keep their doors shut and imposed capital controls. Since then, ATM withdrawals have been limited to €60 a day. Pensioners, most of whom do not have cash cards, were allowed into the branches to withdraw €120 a week.
By the end of the week, there were strong rumours that ATM withdrawals would have to be limited to €20 a day to preserve what little ELA remained. Ms. Greene said that if no more emergency loans come, the Greek banks would be able to survive until July 20 at best, when Greece owes the ECB a bond payment of €3.5-billion.
"If the banks have no cash left, the ECB will demand recapitalization or resolution plans and Greeks will be out in the streets," she said.
There have been reports that any recapitalization plan might have to be funded by a "haircut" on deposits, similar to the one imposed on the Cypriot banks in 2013 during which banks were closed for two weeks and capital controls lasted two years. The Greek government has denied a haircut is being planned, though in a crisis situation, it would no doubt emerge as an option.
The capital controls and the No vote are a blow to Prem Watsa, chairman and CEO of Toronto's Fairfax Financial Holdings. Last year, Fairfax led a high-profile investor group that pumped €1.3-billion of capital into Greece' Eurobank. That was half of the €2.9-billion raised.
The landmark deal made Eurobank the first Greek bank to return largely to private ownership after the crisis that nearly proved fatal to the entire banking sector only two years earlier. Eurobank shares have lost 62 per cent in the last year.