1. Pretend and extend. The ECB, through the Emergency Liquidity Assistance operated by its network of national central banks, would continue to extend exceptional funding to Greece. This would be done under the pretense that it is helping Greece deal with a liquidity problem instead of acknowledging the country’s true predicament, deep economic and solvency deficiencies. This approach has the advantage of keeping options open in the hope that Greece and its creditors will finally break through to decisive policy and financial solutions. The downside is that it would increase the ECB’s financial exposure to a problem case that, at least so far, has shown little chance of resolving itself in an orderly fashion. It would also raise concerns about burden-sharing as the ECB would act even as other creditors, not only from the private sector but also public institutions such as the International Monetary Fund, are scheduled to get repaid.
2. Pull the plug. Under this scenario, the ECB would be forthright. It would limit any further financing to Greece, raising not only the legitimate burden-sharing issues but also rightly noting that liquidity support would continue to prove ineffective without accompanying measures to improve growth and financial solvency. It would make further assistance conditional both on policy progress and new money to Greece from other sources, along with debt reduction. If such conditions failed to be met, the ECB decision would likely lead to even greater capital and deposit flight from Greece. And this, under most realistic scenarios, would prompt the Greek government to impose capital controls, default on payments and take even more draconian steps to gain control of any idle cash balances in the country. All of these developments would increase the risk of Greece exiting the euro zone.
3. Pull the plug as part of a comprehensive Plan B. In this case, the ECB’s refusal to extend additional liquidity support would be part of an attempt (albeit a risky one) at an orderly pivot for both the euro zone and Greece. The ECB would seek to minimize the risk of Greek contagion and disorderly spillovers to other economies (such as Cyprus, Italy, Portugal and Spain) by expanding its funding windows for both governments and financial institutions. It would also step up its large-scale program of security purchases (known as quantitative easing). Meanwhile, work would proceed on some sort of interim European arrangement for Greece, including the possibility of an association agreement with the European Union or, even, remaining in the EU but outside the euro zone, like the U.K.