ECB likely to maintain ELA to Greece

With the line of communication still, the ECB is likely to maintain ELA. However, the government is likely to issue IOUs which could be used to pay civil servant and pensioners or to alleviate the Greek banks liquidity problems.

The ECB is likely to issue a similar statement than for Cyprus in 2013, urging the Greek government to request a programme for bank(s) recapitalisation. The ECB will cut ELA funding only when the Eurogroup and EU leaders make it clear that Grexit is unavoidable. Once the political backing is given, cutting the ELA funding altogether will lead to financial chaos, banks defaulting and ultimately Grexit, says Societe Generale.

The EU is much better equipped to stem contagion today than in 2009-10, with a QE programme in place, the ESM facilities (the Secondary Market Purchase Programme inparticular) and the OMT. Moreover, the direct financial costs are manageable though Cyprus, already under a programme, is the weakest link. The political contagion is the mostsignificant risk, though not immediate. Limiting this risk will require further steps towards a genuine monetary, fiscal and political union.