The new Greek government's reluctance to accept EU proposals for an extension of its austerity-based bailout programme may result in letters of credit (L/Cs) becoming harder to come by.

The new government is currently proposing a bridging agreement to keep the state functioning for a few months until a new, and the Greek government hopes less austere, final agreement with the EU is reached.

ECB support

But if the EU refuses to soften the bailout package and Athens refuses to accept the current austerity measures, there may be severe consequences, particularly if the European Central Bank (ECB) is not prepared to support the Greek financial system.

The ECB has already signalled its intentions in this respect by not accepting Greek debt paper as collateral for its refinancing operations.

Greek banks

The Greek banking sector is reportedly supported by ECB loans of some EUR 88 billion while the Bank of Greece is authorised to provide more expensive Emergency Liquidity Assistance (ELA) loans up to EUR 9.5 billion.

The ELA loans would enable Greek banks to withstand cash withdrawals. If withdrawals exceed the upper ELA limit and the ECB refuses more cash to Greek banks, then cash withdrawal limitations may well be imposed, according to analysts.

L/C implications

They add that capital controls such as those used during the Cypriot financial crisis would then be likely.

The capital controls in turn would make L/Cs issued by Greek banks unacceptable in parts of the world.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.