Debt Conundrum to Keep Greece Banks in Cash Control Mode

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.  Rehabilitating the country’s banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece’s debt mountain?

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks.  The longer it takes, the more critical the banks’ condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers’ ability to repay loans.

“The banks are in deep freeze but the economy is getting weaker,” said one official, pointing to a steady rise in loans that are not being repaid.  This cash ‘freeze’ is unlikely to thaw soon, although capital controls may be slightly softened, such as the loosening on Friday of restrictions on foreign transfers by businesses.