NICOSIA, Cyprus – The longer it takes to secure a deal to keep Greece in the euro, the greater the risk the country will have to put its financial system in lockdown to prevent worried savers from pulling money out in droves.
Banking industry figures suggest Greeks have been taking money out ahead of the country's emergency talks with creditors on Friday. If that trend picks up, the banks could become so weak that the government decides to impose capital controls — limits on what people can transfer out of the country or even withdraw from cash machines.
For now, the European Central Bank is propping up the Greek banks with emergency cash, keeping alive hopes that the lenders will not collapse.
But the ECB support — called Emergency Liquidity Assistance, or ELA — could easily be turned off if Greece's bailout negotiations fail to yield a deal. The ECB would be under intense pressure to stop pumping money into a banking system that is collapsing anyway.
To avoid that scenario, the Greek government could, if needed, resort to capital controls.
Analysts warn that is a possibility if Greece and its creditors do not find a deal by Feb. 28, when the country's European bailout program expires.
Going into a meeting on the issue Friday, the two sides remain far apart. Without a deal soon, analysts say Greeks and investors could pull their money out of the banks at a faster pace.
By last count, in December, deposits in Greece were at 207.9 billion euros ($235 billion), the lowest level since June 2012, when there were last fears that Greece might fall out of the euro.
Though the central bank of Greece has yet to publish figures for January and February, separate reports show the ECB increased the amount of financial support for the country's banks, a sign the lenders need to fill a hole left by deposit outflows. The Bank of Greece declined to comment on the issue.
"If there's no deal (on Friday) then there could be substantial further flight (of money) as we head into the last week of the deal," said Simon Derrick, a senior analyst at Bank of New York Mellon.
THE CYPRUS PRECEDENT
Though capital controls are in theory against the rules of the euro, there is a precedent. They were used in Cyprus in 2013 when the country was negotiating a bailout deal.
The population of Cyprus was stunned when eurozone ministers at a late Friday meeting in March 2013 decided to raid bank deposits as part of a rescue of the country's banking system.
Following signs of a run on those banks, the government decided to shutter them all. Banks were left closed for days before authorities imposed harsh restrictions on money withdrawals and transfers abroad.
Initially, people could only take out a maximum 300 euros ($340) cash from their deposits and couldn't transfer money out of the country. Large business transactions involving money transfers abroad had to be strictly vetted.
It took about two years before almost all restrictions were lifted.
WOULD IT WORK IN GREECE?
It worked in Cyprus, though at a high cost. While deposits there are down 35 percent, they are high enough for the banking system to survive. But it was a blunt instrument to say the least. The Cypriot economy plunged into recession and confidence in the banks took a hit.
In Greece, capital controls could be insufficient if the country does not secure a bailout deal with its European lenders. In case of no deal, the ECB would have to consider whether to pull the plug on Greek banks.
The Greek government would then have to take over from the ECB the burden of providing financing to the Greek banks. But because it has no money, it could do so only by dropping out of the euro and printing its own money.
"As soon as it got out that Greece was likely to leave (the euro), market disruption and huge capital outflows from Greece would threaten to make an exit very messy," analysts at Capital Economics said in a research paper.
"An important initial step would almost certainly be the imposition of capital controls, while Greek banks would be closed for a period."
Pylas contributed from Brussels.