Debt conundrum to keep Greek banks in months-long freeze

Sun Jul 26, 2015 4:09am EDT
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By John O'Donnell, Lefteris Papadimas and Francesco Canepa

FRANKFURT/ ATHENS (Reuters) - Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

Rehabilitating the country's banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece's debt mountain?

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks.

The longer it takes, the more critical the banks' condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers' ability to repay loans.

"The banks are in deep freeze but the economy is getting weaker," said one official, pointing to a steady rise in loans that are not being repaid.

This cash 'freeze' is unlikely to thaw soon, although capital controls may be slightly softened, such as the loosening on Friday of restrictions on foreign transfers by businesses.

"Ultimately, you can only lift the capital controls when the banks are sufficiently capitalized," said Jens Weidmann, the head of Germany's Bundesbank, which pushed the ECB to pare back bank funding, leading to their three-week closure.

The debate is interlinked with a wrangle over reforms, about Greek sovereignty in the face of European controls and whether the country can recover with ever rising debts that have topped 300 billion euros, far bigger than its economy.   Continued...

A woman walks past an Alpha Bank ATM and a shopping window announcing sales in central Athens, Greece, July 21, 2015. REUTERS/Yiannis Kourtoglou