Bank Crunch Leaves Greece Few Options

        ATHENS—Greece's increasingly fragile banking system is limiting Prime Minister Alexis Tsipras's room to bargain for better bailout terms and, more than anything, has shoved him toward compromise, Greek officials say.
        As nervous Greek savers continue to pull their money from banks, the country's four major lenders are being sustained by a life-support drip of emergency liquidity reviewed daily by the European Central Bank. If the ECB chooses to end that assistance, Greece would be forced overnight into a perilous regime of capital controls.
        "Their support is crucial for the Greek banks to stay alive," says Regina Argenio, an analyst at Standard & Poor's.
        Short on cash, and with nowhere else to turn, Greek banks have had to rely on the central bank for money to give to fleeing depositors.
        Bankers in Athens say news that Mr. Tsipras had proposed a compromise Monday has helped stem the flight of deposits, which they say reached more than ˆ1.5 billion ($1.68 billion) on Friday. Deposit withdrawals fell to around a third of that on Tuesday and appeared to remain at that lower pace Wednesday.
        But a breakdown in negotiations could quicken the pace anew. Eurozone finance ministers called off negotiations Wednesday evening after a little over an hour, saying Mr. Tsipras first had to agree on budget cuts and policy overhauls with the three institutions overseeing the country's bailout.
        Few expect the ECB to shut off the lifeline while the talks continue. But it is unclear what the central bank would do if there is no agreement when the eurozone's portion of Greece's ˆ245 billion bailout program officially expires on Tuesday.
        Getting Greeks to come back to the banks won't be easy. Konstantinos Drakopoulos, who owns a clothing store in Athens's ritzy Kolonaki district, got frightened in December, when it became clear that Greece would have new elections that could open the door for the confrontational left-wing Syriza party.
        "I took my money and I sent it to other countries," said Mr. Drakopoulos, standing in his shop on a warm late afternoon. His racks were full of loose, pastel dresses. He said he keeps in Greece only the money he needs to operate his business and isn't planning to repatriate the rest soon.
        "As long as we have this government, we will have the crisis," Mr. Drakopoulos said. "Communism is dead—it is for Russia, for Cuba, not for Greece."
        Besides international transfers, bank figures suggest there has been a huge spike in cash withdrawals; the chief executive of Piraeus Bank, one of the four major banks, estimated in an investor conference call last month that an amount equivalent to about a quarter of Greece's annual economic output is circulating in the country as cash.
        Some Greeks are using safe-deposit boxes as their banks, putting in and taking out bills as needed. That way, if banks are shut or capital controls are instituted, they will have money on hand.
        The banks' emergence as a flash point has been sudden. Greek lenders suffered deeply during the early years of the crisis, and were especially wounded by Greece's massive default in 2012 because they were major holders of Greek government bonds. All were rescued by the government.
        But by last spring and summer, all the major banks were able to issue bonds to investors—a sign of relative confidence. One bank, Alpha Bank, raised ˆ500 million by selling three-year bonds with a yield of 3.5% last June. It said it had orders from investors from 15 countries, demonstrating the "great appeal of the bond offering to the international investors' community."
        Another bank, Eurobank Ergasias SA, was able to raise enough cash by selling shares to become majority privately owned.
        The banks were "were well-positioned to absorb the shocks," said Nondas Nicolaides, an analyst at Moody's. Indeed, by last September they had grown domestic customer deposits back to ˆ179 billion, up from ˆ159 billion in June 2012, after the default.
        But the political turmoil in December sent them back down; deposits stood at ˆ143 billion at the end of April according to official figures, and several billion more have since left.
        To replace the deposits, banks have had nowhere to turn but the ECB. In the worsened climate, banks now can't sell bonds. They have also lost access to "repo" markets in which they could receive cash in exchange for some of their less-liquid assets.
        "They lost all the international exposure they had developed since the end of 2012," said Ms. Argenio at Standard & Poor's.
        That means banks must lure back domestic depositors if they want to reduce their dependence on the central bank. But bankers say they need a deal—and soon—for that to happen.
        Some say the billions of euros floating around in cash—rather than spirited out of the country entirely—is a silver lining. "I think a significant part of this will return to the domestic banking system once there is stabilization," says Platon Monokroussos, the chief economist of Eurobank.
        And some in Greece are standing firm. In central Athens this week, Evita Kalogianni, a professor of French, said she wasn't pulling her money out.
        "It's a little bit dangerous," she said. "But we like to defend our cause. We keep it in Greece."
        Viktoria Dendrinou contributed to this article.
        Write to Charles Forelle at charles.forelle@wsj.com
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        (END) Dow Jones Newswires

        June 25, 2015 01:30 ET (05:30 GMT)

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