It was only on Friday that Greece was the subject of the analysis on this website and it is a sign of the times that it has pushed itself to the top of the agenda yet again. It really is extraordinary that a country which only provides some 2.9% of the capital for the European Central Bank is the source of such continual angst and worry, to say nothing about the suffering of the ordinary Greek citizen. But it finds itself being squeezed between the rock of the fact that it needs more financing and cash and the hard place which is that more Euro area austerity and hence likely suffering is required to get it.
The number of the day is Greece’s national debt to GDP ratio at the end of 2014 which was 177.1%. Why well it was 171.3% in 2011 before the PSI (Private Sector Involvement) which was supposed with reforms to put it on course for 120%. Up is the new down yet again!
Raiding the piggy-bank
Yesterday the Greek government acted to get its hands on any cash deposits held by local and municipal authorities. From Kathimerini
the government on Monday signed a legal degree obliging state bodies, with the exception of pension funds, to transfer their reserves to the Bank of Greece for the state’s use.
If you are wondering if pension funds will be exempt next time then I am sure that you are far from the only one?! This is estimated to raise some 1.2 billion Euros and will keep the wolf from the door for now. But of course he will keep knocking. There are obvious side-effects from this of which the simplest is that the bodies which had the cash mostly did so for a reason and what if they need it? Of course the elephant in the room is how far down this road is the new Greek government willing to travel?
A crunch is being accelerated by the way that the Greek government is making extra spending commitments. In the instance quoted below by Kathimerini it is reversing previously planned cuts to pensions.
The government’s general secretariat has already received the draft amendments that will suspend the application of the zero-deficit clause on supplementary pensions, which would have led to cuts of 7 percent since the start of the year and 8 percent from July 1 onward.
The mathematical equation for the calculation of the retirement lump sum will also be revised, so the amount will not be less than that given to those who retired before August 31, 2013.
Could Greece raise its own funding?
The answer is yes as to a limited extent it already does so. Only last week on the 15th of April it issued some 13 week Treasury Bills. However in these times of ultra-low interest-rates a yield of 2.7% is a warning sign. You see my subject of yesterday Finland has a two-year yield of -0.21% and another seven of its Euro area colleagues also have negative bond yields at this maturity. Those of a nervous disposition might like to look away before I point out that the Greek equivalent is at 29% and nudging 30% today. An enormous gap which questions the whole concept of these nations being together in a single currency as we wonder what happened to the convergence of interest-rates which was promised? Yes the official short-term rate can be set but the dreams of the same set of interest-rates applying to each national economy have turned into a nightmare on Greece street.
The simple reason for the difference is the default risk for Greece is very high. If you are wondering why Italy and Portugal who also possess a substantial if lower default risk than Greece are not on the same boat that is because the ECB is keeping their yields low via its QE (Quantitative Easing) purchases. It has a problem with buying existing bonds in Greece because it and the various bailout mechanisms own so much of it (~80%) already. As to buying freshly minted ones well that would be pretty explicit debt monetisation and the ECB prefers to keep that implicit.
In case you are wondering why in such circumstance investors only ask for 2.7% yield on Greek Treasury Bills? The answer is twofold. Firstly there is a type of convention that these are backed by the central bank which can always print to repay them. Of course that is dangerous in a country which has led to so many conventions being broken. But more crucially the Greek banks have been the major purchasers in recent times and as to the risks well when this has happened to you I guess your view of risk gets twisted and distorted.
Greek bank stocks index in Oct 2007: 78,000 points
Greek bank stocks index in April 2015: 431 points (H/T @ReutersJamie )
What about the central bank?
This can be a source of funding but as hinted at earlier the ECB has been active in this area for some time. ECB President Mario Draghi pointed this out at his latest monetary policy press conference.
As you know, we approved the ELA and we’ll continue to do so, extending liquidity to the Greek banks while they are solvent and they have adequate collateral. So far, we have reached an exposure to Greece of €110 billion, which is the highest in the euro area in relation to GDP.
Here we have an awkward situation where the ECB has splashed the cash in the past but now finds itself keeping the Bank of Greece on a very short leash. The amount of Emergency Liquidity Assistance or ELA is being increased in the hundreds of millions most weeks rather than the larger amounts the Greek authorities would like. No doubt the ECB is nervous about the 74 billion Euros of ELA already sitting on the balance sheet of the Bank of Greece and what would happen to it in a default.
As an aside this sort of situation covers what I meant when I wrote in the past about issues with the ECB performing the “lender of last resort” role as we can see circumstances where it would say no. In addition it is considering a tightening of its terms. From Bloomberg this morning.
ECB staff have produced a proposal to increase the haircuts banks take on the collateral they post when borrowing from the Bank of Greece, the people said, asking not to be named as the matter is private.
I will put “the matter is private” is my financial lexicon for these times! But we see that the heat is on although in a more optimistic vein I suppose one might argue that at least the Greek banks presumably have some collateral left!
A 2/3rds vote on the Governing Council of the ECB is required for such changes.
Yet more negativity
This has arrived this morning.
THREE-MONTH EURIBOR DROPS TO -0.001% (H/T @FerroTV )
And yes it is time for Foreigner to get out their guitars and sing.
Feels like the first time, it feels like the first time
It feels like the very first time.
Someone has a sense of humour making the move so marginal but there has been a clear trend and we now know what tends to happen when this particular Rubicon is crossed. Also this one matters as many instruments,loans and structured products are indexed to 3 month Euribor as this from Patricia Kowsman of the Wall Street Journal highlights.
Some 43% of Portuguese mortgages with variable rates are linked to the 3-mo euribor
This is a watch this space moment and some may consider it to be like “lost in space”.
The bailout mechanisms
These have money to lend but not on terms – austerity – which the current Greek government is willing to contemplate.
In the Euro area crisis few phrases have been as apt as that of, “Never believe anything until it is officially denied” variously credited to Otto Von Bismarck and Jim Hacker. On that front I bring you this mornings word from officialdom via TO BHMA.
The chief of the European Commission Jean-Claude Junker has ruled out the possibility of a Greek default and departure from the Eurozone.
Mind you he has previously incriminated himself.
When the going gets tough, you have to lie.
If we move to the economics and finance we see yet another quandary of the Euro area and credit crunch crisis. There is a flood of liquidity in the Euro area as evidenced by another interest-rate benchmark plunging through the ice into below zero territory. Yet the place that most needs it,Greece, finds itself in a desert lacking liquidity and after last night’s move by its government there must be fears of another deposit outflow. This is a cycle which sucks ever more breath out of the Greek monetary system.
Meanwhile the world watches in a manner described by The Police.
Every breath you take
Every move you make
Every bond you break
Every step you take
I’ll be watching you
Every single day
Every word you say
Every game you play
Every night you stay
I’ll be watching you