Greek banks are running short on the collateral they need tostay alive, a crisis that could help force Prime Minister AlexisTsipras's hand after weeksof brinkmanship with creditors.

As deposits flee the financial system, lenders use collateralparked at the Greek central bank to tap more and more emergencyliquidity every week. In a worst-case scenario, that lifeline willbe maxed out within three weeks, pushing banks toward insolvency,some economists say.

“The point where collateral is exhausted is likely to be near,”JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote ina note to clients May 15. “Pressures on central government cashflow, pressures on the banking system, and the political timetableare all converging on late May-early June.”

European policy makers are losing patience with Tsipras who saidas recently as May 14 that he won't compromise on any of his keydemands. He's planning to force a discussion of Greece at a summitof European Union leaders in Latvia that begins on May 21, a dayafter the European Central Bank's (ECB's) Governing Council meetsin Frankfurt.

Bonds Drop

Greek shares and bonds fell on Monday, with the benchmark AthensStock Exchange dropping 1.4 percent at 1.28 p.m. local time. TheASE has fallen 26.3 percent in the past year, making it one of theworst-performing primary equity indices tracked by Bloomberg.Yields on two-year Greek notes jumped 280 basis points to 23.71percent, the highest level this month. Greek bonds remain thebest-performing sovereign securities over the past month, accordingto Bloomberg's World Bond Indexes.

While talks are centering on whether to give Greece more money,the ECB could decide to raise the stakes as soon as this week if itincreases the discount on the collateral Greek banks pledge inexchange for cash under its Emergency Liquidity Assistance (ELA)program.

Such a move might inadvertently prompt a further outflow of bankdeposits and pressure Tsipras to choose between doing a deal andputting his country on the road to capital controls. A Greekgovernment spokesman declined to comment, as did officials at theGreek central bank and the ECB.

“We are in an endgame,” ECB Executive Board member Yves Merschsaid in an interview with Luxembourg radio 100.7 broadcastSaturday. “This situation is not tenable.”

The arithmetic goes as follows: Greek lenders have so far neededabout 80 billion euros ($91 billion) under the ELA program.

Banks have enough collateral to stretch that lifeline to about95 billion euros under the terms currently allowed by the ECB, aperson familiar with the matter said. With the central bank raisingthe ELA by about 2 billion euros every week, that could take banksto the end of June.

A crunch will come if the ECB increases the haircut on Greekcollateral to levels not seen since last year. That could beprompted by anything from a complete breakdown in talks to a misseddebt payment, the official said. A continuation of the currentimpasse could even be all that's needed, the official said.

An increased haircut would reduce the ELA limit to about 88billion euros, the person said. While that gives banks about fourweeks before hitting the buffers, the leeway is so limited thatGreece might need to impose capital controls, limiting transactionssuch as ATM withdrawals, to conserve the cushion. Market NewsInternational first reported on the reduced ceiling on May 12.

“Since the great crisis of 2008, Europe has created many toolsto control the flow of money and banks,” said Andreas Koutras, ananalyst at In Touch Capital Markets in London. “Thus the crisis inGreece is more likely to be resolved through the tools of the ECBrather than” by political means.

Investors in Greek debt are showing few signs of panic for now,with the yield on the Greek 10-year bond having dropped about 3percentage points from the 13.64 percent on April 21.

Nor are ECB policy makers willing to raise the pressure on Greekbanks on their own. Central bank governors won't take any actionwhich would be seen as pushing Greece out of the currency bloc ifnegotiations show progress and convergence, the person said.

Collateral Fix?

Greek lenders are also working with the country's central bankon plans to collateralize additional assets, a separate localofficial with knowledge of the matter said.

Still, it's unclear if these assets, including governmentguarantees, would be accepted by the ECB if the standoff in bailoutnegotiations persists. According to a senior Greek commercialbanker, the ECB's decision on what to accept as collateral isessentially a judgment call, and not necessarily related to thequantity of the assets available.

“The Greek government at this point has no room for maneuver,”Spanish Economy Minister Luis de Guindos said in a speech in Madridon Monday. He said he was still optimistic a deal will be reachedin the coming days. “This deal is essential for Greece given itsliquidity situation,” he said.

Tsipras will push Greece's case at this week's EU leaders'summit in Riga after a weekend that showed few signs of progress.An International Monetary Fund memo dated May 14 said Greece won'tbe able to make an IMF payment on June 5 unless an accord isreached with partners, the U.K's Channel 4 news reported onSaturday.

The ECB's next full monetary policy meeting is on June 3, twodays before the IMF payment.

“There were too many people crying wolf before,” Koutras said.“But as Hemingway wrote: How did you go bankrupt? Two ways:Gradually, then suddenly.”

–With assistance from Maria Tadeo in Madrid.

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