Still breathing space for Greek banks

Frankfurt - Greece's banks might not be declared insolvent for several days after a default, a European Central Bank (ECB) supervisor said, offering the prospect of some temporary breathing room in the run-up to a referendum.

The remarks by Felix Hufeld, who heads German banking watchdog Bafin and sits on the ECB's banks supervisory board, underline the gravity of the situation facing Greece's banks immediately after a missed payment to the International Monetary Fund and an end of its bailout programme.

But they also indicate that the ECB may not immediately deem the banks bust, thereby cutting their access to central bank funding ahead of a bailout vote on Sunday.

A withdrawal of such support would trigger the banks' collapse and nudge Greece towards a euro exit. Hufeld's comments signal that such a step is unlikely to come this week but instead later.

Asked how long Greek banks could hold out were the country to miss a €1.6bn payment to the International Monetary Fund (IMF) on Tuesday, Hufeld said they could be considered solvent for up to five days.

"It's a matter of days," Hufeld, who sits on the ECB supervisory board that decides whether Greek banks are still solvent, told the Frankfurt business journalists' club late on Monday, in remarks set for release on Tuesday.

"You can argue for hours about whether it's two, three, four or five days," he said.

Banks must be deemed to be solvent in order to tap the roughly €89bn of Emergency Liquidity Assistance.

The judgment on whether they are falls to the ECB's supervisors. It is then passed to the institution's decision-making Governing Council to act.

Despite a breakdown in relations between Greece and its eurozone neighbours, central bankers are eager not to detonate the country financially by cutting funding entirely.

They have already imposed a stringent cap, rejecting a Greek demand for an extra €6bn on Sunday, sources have said. This required the imposition of capital controls limiting cash withdrawals.

ECB Executive Board member Benoit Coeure said on Monday that if Greeks vote "Yes" in the referendum for the aid package, he had "no doubt" eurozone authorities will find ways to meet commitments towards Greece.

Hufeld warned against thinking that Europe could wash its hands of Greece's problems if the country and its banks become insolvent, pointing out that critical functions, provisioning and logistics had to be maintained.

"If we declare the Greek banks insolvent, it's not the end of the story," he said.