The European Central Bank must decide whether or not to bend its rules Wednesday and keep Greek banks alive a day after Greece became the first developed country to miss an International Monetary Fund repayment. The ECB last week refused to raise a cap on Emergency Liquidity Assistance, or ELA, available to Greek banks, which have relied on the emergency funding for months amid heavy depositor withdrawals. ELA is administered by national central banks—in this case, the Bank of Greece—which provide liquidity in return for pledged collateral. But the ECB Governing Council ultimately has authority over the program. See: Greece will proceed with referendum as planned. Greek banks were left to rely on ELA after the ECB earlier this year revoked a waiver that had allowed the institutions to pledge junk-rated Greek government bonds as collateral in exchange for short-term loans via the ECB’s regular funding operations. Under the ECB’s rules, ELA can only be provided to banks that are seen as solvent. And that provides the dilemma for the ECB policy makers. Accelerating deposit withdrawals coupled with the ECB’s decision last week to leave the ELA cap at around 89 billion euros ($98.7 billion) left Greek authorities with little choice but to close banks and impose capital controls this week ahead of a Sunday referendum on creditor demands. “It is very difficult to see how one could conclude that banks that are basically closed because they have no access to cash, operating under a government that has just defaulted to the IMF, could possibly be solvent,� said Gary Jenkins, chief credit strategist at London-based LNG Capital, in a note. That means the ECB faces a political decision “as to whether the ECB sticks to its rules or decides to keep everything as it is (which in itself is a tightening of conditions) so as not to be accused of interfering in the referendum,� Jenkins wrote. The ECB is unlikely to take the drastic step of removing ELA altogether, but it could further tighten funding by increasing the size of the discounts, or haircuts, on collateral Greek banks must pledge to the Bank of Greece in return for the assistance, said Chris Scicluna, economist at Daiwa in London. But it isn’t clear the ECB will even go that far, Scicluna said, noting rumors that such a policy move “would have significant implications for at least one Greek bank

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