Is it game over for Greece?

The threat of "capital controls" now hovers over every Greek bank account

All eyes are on Sunday's election results in Greece.

It has been cast as a referendum on the country's future membership of the eurozone.

But could it be that the result no longer matters?

The steady withdrawal of cash by depositors from the Greek banks has reportedly accelerated in recent days.

And if this apparent bank run gets out of hand, there is a danger that Greece could find itself forced out the euro, whichever way its citizens vote.

Out of cash

Nobody knows who will win the elections - there has been an official polling blackout since 2 June - although, whatever the outcome, it will most probably be followed by many days of coalition negotiations.

The big question is whether the radical left-wing upstarts of Syriza will pip the established centre-right New Democracy to first place.

That would give Syriza a bonus 50 seats, making it by far the biggest party in the 300-seat parliament, though probably without a majority.

Syriza has vowed to reject the austerity programme agreed with Greece's rescue lenders in the eurozone and at the IMF.

But her eurozone partners have made clear in that case, they would not make any more bailout money available.

The government would then literally run out of cash within a couple of months.

And if the government does not have enough money to repay its debts, then the Greek banks - who are among the governments' biggest lenders - would be bust.

In which case, the European Central Bank would have no choice but to cut off its lending to the banks.

And that would mean the banks also run out of euros, in effect forcing Greece out of the eurozone.

Bluff?

This narrative makes it sound as though it is up to Greek voters to decide whether they stay in the euro.

Germany and Greece's other lenders are saying: "Vote Syriza and you are out."

But Syriza says that the Germans are bluffing.

In their view, the rest of the eurozone has way too much to lose from forcing Greece out.

Syriza says it would cause a financial panic that would soon engulf Spain and Italy, posing an existential threat to the single currency.

Last weekend's bailout of Spain - which came with virtually no official strings attached - has seemingly strengthened Syriza's argument that it can repudiate the far more stringent conditions that came with Greece's own bailout.

Greece's lenders have countered with tough rhetoric designed to influence the election outcome, as well as with what may turn out to be a very badly thought out "leak".

Syriza leader Alexis Tsipras says the Germans are bluffing

On Tuesday, <link> <caption>anonymous EU officials told Reuters news agency</caption> <url href="http://uk.reuters.com/article/2012/06/12/uk-eurozone-greece-capital-idUKBRE85A0ZE20120612" platform="highweb"/> </link> that they had discussed imposing capital controls on Greece if it leaves the euro.

"Capital controls" mean limits on how much money Greeks can withdraw from ATMs, or transfer - physically or electronically - across Greece's borders.

In other words, the savings of Greek families and businesses would be frozen, so that they could be forcibly converted into new drachmas, which would presumably then lose half or more of their value against the euro.

Snowball

Unsurprisingly, Greeks have responded to this news by taking their money out of the country's banks.

Withdrawals have reportedly <link> <caption>amounted to up to 800m euros a day in recent days</caption> <url href="http://uk.reuters.com/article/2012/06/13/uk-greece-banks-idUKBRE85C0CG20120613" platform="highweb"/> </link> .

That figure may sound high, but it is actually small fry compared with the 170bn euros in Greek deposits still at the country's banks.

But Greeks have had a long time to plan for this event.

And there is a real risk - as with any such phenomenon - that the bank run could snowball.

Once Greeks see people around them pulling their money out, they are likely to follow suit.

Nobody wants to be the straggler left in the bank when the capital controls get imposed.

Automated bailout

If Greece does face a bank run, it will be historically quite rare.

When a Greek removes 1,000 euros from his or her account, the bank borrows the money from the Greek central bank.

What is unique is that the Greek central bank then automatically borrows that same 1,000 euros from the European Central Bank via the Target2 payments system used to settle cross-border transactions in the eurozone.

In other words, the run on the Greek banks is being financed by the rest of the eurozone. Every 1,000 euros withdrawn from the Greek banks increases the ECB's exposure to an eventual euro exit by Greece by precisely 1,000 euros.

To repeat, this happens automatically, as part of the ECB's payments system. It has nothing to do with the country's much-reported rescue loans.

The Greek central bank has already borrowed more than 100bn euros this way.

Collusion?

If the bank run does pick up, the Greek authorities could stop it by themselves imposing capital controls.

But would they actually do this?

In 2001, when Argentina restricted dollar withdrawals from its banks, it led to chaos on the streets and a catastrophic breakdown in the political system.

Would Greece's caretaker government or its central bank feel it had the authority to put their country through a similar ordeal?

Greeks have had a long time to plan for a possible exit from the eurozone

The Argentines imposed controls because they were running out of dollars.

But the Greeks have a potentially unlimited supply of euros, courtesy of the ECB.

Indeed, the Greek government, banks and central bank could collude to make as much money available as necessary to keep feeding the bank run.

Keeping the banks' doors open could be deemed a sensible move to stop the panic.

And if Greece did end up leaving the euro - well, in that case, the families and businesses who pulled their money out of the banks would have locked in the euro-value of their savings, while the ECB would be left to pick up the bill.

Double or quits

And what about the ECB?

It, too, could stop the bank run, by ordering the Greek central bank to stop lending to its banks, or - failing that - by blocking transfers of money from Greece to the rest of the eurozone.

That would force the Greek banks to close their doors and would amount to pushing Greece out of the euro.

Would the ECB do this?

It would be a highly political decision to cut Greece loose before the country had clearly formed a rejectionist government. And the ECB does not do politics.

Moreover, pulling the plug on Greece would set a terrible precedent.

Spain and Italy are already reporting a slow but steady withdrawal of deposits from their own banks.

If the ECB made clear that money was not safe in Greece's banks, the exodus from these other two much bigger troubled countries' banks may well speed up.

But a decision not to pull the plug would also be dangerous.

The ECB would face a game of double or quits.

Every day that it allowed the bank run to continue, the ECB's exposure to losses from an eventual Greek exit would increase.

It's hard to say which way the ECB would jump.

The question is, how many Greeks will wait to find out?