The European Central Bank has fired a warning shot at Greece by refusing to raise the cap on loans available for the struggling nation after its people shunned the latest bailout agreement through a historic referendum.
Greece has been relying on the ECB for loans to keep its banks liquid and its domestic financial apparatus functional for more than five years.
The bank's 25-person governing council met on Monday night to discuss the outcome of the Greek referendum. While it is yet to cancel its Emergency Liquidity Assistance program for Greece, it has refused to raise the cap on maximum loans.
The bank also tightened liquidity conditions by requiring increased collateral from Greek banks and also raised concerns about the quality of the bonds available as collateral. The ECB is yet to specify the extent of this devaluing.
"The governing council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area," the bank said in a statement.
"In this context, the Governing Council decided today to adjust the haircuts on collateral accepted by the Bank of Greece for ELA."
Investment bank Barclays is one among several positioning for the ECB to block Greece off from the ELA by July 20, when it is on course to fail to meet its 4.2 billion euro debt to the euro zone's central bank, which would likely force Greece out of the euro.
"We would expect ECB's governing council to shut down ELA at the latest by 20 July," analyst Francois Cabau said in a note to investors.
"Assuming that all of the pledged collateral at the ECB is recorded at (close to) par on Greek banks' balance sheets and that current average haircut on collateral is 50 per cent, then retention of the collateral by the Eurosystem would translate into a more than €30 billion loss for the banks. This alone would wipe out shareholders' equity. The Greek central bank will eventually need to print its own currency in order to inject new liquidity and capital."
Greek Prime Minister Alexis Tsipras spoke to the ECB president Mario Draghi on Monday night to discuss the Greek banking systems ongoing liquidity crunch, in which the ECB plays a key role.
The ECB has become one of the key players in the Greek debt crisis, as a central force of European cooperation and control. Along with the European Commission and the International Monetary Fund, it is part of the Troika, which manages Greece's compliance with bailout terms.
The ECB's core job is as maintaining the Euro so it oversees the monetary policy of the zone, as well as foreign exchange reserves and liquidity for the euro. It is also a "lender of last resort" for member states.
It is one of Greece's main creditors, specifically lending money to Greek banks to keep the system functional and liquid. Reuters estimates put the total owed at 14 billion euros in Greek bonds, of which slightly under 8 billion matures in July and August.
Most lending programs require collateral, of which Greece has little now its bonds have weakened. Instead for the last five years, Greece needs to be part of a bailout and economic recovery program to access the funds.
This requirement to be in a bailout and recovery program made Greece's 'no' vote at the referendum either particularly brave or foolish, as it meant it could cut itself off from the organisation keeping its banks afloat.
Greece is now outside of a bailout program, so its central bank can not access any of the ECB's lending facilities other than the Emergency Liquidity Assistance.
However this too can be shut off if a two-third majority of the ECB's governing council vote to do so. This would force Greece into intense financial crisis and outside of the Euro.
Greece is not the only headache for the ECB. Previously Ireland and Cyprus presented ongoing issues for the bank, and Spain and Portugal are also dealing with economic challenges that could escalate in coming years, especially if they follow Greece's lead in fending off severe austerity programs through domestic political mobilisation.
ECB president Mario Draghi warned in June that time was running out for Greece and its leaders needed to be proactive and accommodating of its lender's expectations.
"While all actors will now need to go the extra mile, the ball lies squarely in the camp of the Greek government to take the necessary steps."
Fidelity analyst Dierk Brandenburg said the Greek bank's draining cash reserves would influence the euro zone decision making process.
"A Grexit is still not the base case," Mr Brandenburg said.
"The most likely scenario is that the ECB remains biased towards financial stability and accommodates the Greeks as much as it can justify. The ECB will most likely extend its liquidity lifeline again but, like last week, not increase the volume."
This would ensure Greek treasury bonds could be rolled this week, leading to Greek banks remaining solvent but illiquid. This would likely keep banks closed and even tighter capital controls enforced in the coming year.
