Greece faces a cash crunch just as the Euro area is awash with liquidity

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?

Reverse Course

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.


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


17 thoughts on “Greece faces a cash crunch just as the Euro area is awash with liquidity

  1. Hello Shaun

    more of a “say hello , wave goodby ” moment for Greece soon I think

    should have been 3 years ago

    never mind , only when their pollies can stop

    “I Can’t Go for That (No Can Do)” hall and oates

    Still for Greece and the united states of europe aka the franko-german empire

    ” This is going to be quite the ride ” Zuse , tron legacy


    Ps : will the Greeks still have popcorn ?

    • Popcorn? Depends if Greek farmers still get a CAP subsidy I guess!

      The “liquidity everywhere but Greece” reminds me of the Rime of the Ancient Mariner;
      “Water, water, everywhere,
      And all the boards did shrink;
      Water, water, everywhere,
      Nor any drop to drink.”

  2. A very well written informative article. Maybe I panic too early but I am amazed the equity markets haven’t taken on board the huge risk of another imminent financial crisis ..and I don’t mean one restricted to Greece or even Europe

    • Hi Humpiebackit and welcome to my website

      These days we should perhaps be grateful that the stock market of Greece has maintained a connection with reality! Although investors will be very unhappy for it to be flirting with 700 when it was over 5000 pre credit crunch making for quite a bear market.

      But in a world when central banks see asset prices as a target -UK with house prices and Japan with equity prices for example- then we get ever more polices to pump them up. Just when the US Federal Reserve gets out of the game and remember this is just in flow terms as the stock of QE is kept constant it is replaced by “Moar” from the Bank of Japan and the ECB. What this means is that any crashes will be ever sharper and more aggressive as markets will not be allowed to adjust in advance.

    • Hi therawbuzzin.

      Should you ever get an straight answer to that question I boldly predict that the seas shall rise, the sky shall fall and worlds shall collide.

      And maybe, just maybe the Lagardes and Barrosos of this world shall get their just desserts, which will most emphatically not include popcorn.

  3. Unicredit Bulbank is getting itself prepared whatever the Greek outcome, by offering variable interest rate car leases. That’s Euribor + 3.199% + a .75% of sum borrowed in “administration fees”

    Compared to 5 years ago, that is a very low rate for a Bulgarian loan. Question is, will it last ?

    • Hi ExpatInBG

      I remember us having a discussion about high savings rate in Bulgaria a while back. I presume that the worm has turned and now it is all cheap borrowing? Actually for a loan which is not secured on a house that is remarkably low, according to the Bank of England the personal loan rate in Feb in the UK was 7.08%.

      What are mortgage rates now in Bulgaria?

      • ubb 5.5, Unicredit 6.1 both floating – the vast majority of the population has historically owned property without mortgage. On that basis new car finance looks cheap. It’s only a small proportion of the professional workers who can afford such luxuries – most people drive 10 to 25 year old cars, some of them Western European MOT failures and formerly crashed cars 😦

        • Hi ExpatnBG

          Thanks for the numbers. I have to confess I was expecting lower ones after the personal loan figures. If mortgages are rare how are the properties originally bought?

          As to crashed cars take care. An ex-colleague of mine bought his dream car second hand only to later discover a more accurate description might have been half of 2 separate versions of his dream car. Fortunately nobody was hurt in the end and with the help of the police he got his money back

    • Sorry – wordpress limits replies, so I reply here. When Gorbachev allowed the bankrupt communist states their freedom, Bulgarians got given the state owned apartments they lived in (or houses for the well connected & party elite) Most apartments are 2 bedroom, many in tower blocks. These are being handed down. With such limited space, 2 children was the norm – so it was infrequent that a young adult couldn’t inherit from a grandparent. The trend of moving to Sofia for jobs means that prices are relatively high & rural villages very cheap. The new professional middle class can afford new apartments but everyone else (excluding the elite bureaucrats & politicians) struggle. Many people also got a semi-rural summer plot (possible to build a dacha) which are now are used by pensioners complete with large vege gardens & apartments handed down to children & grandchildren.

      The old communist blocks are ugly with flaking concrete facades, uninsulated, with basic kitchens/bathrooms but strong – no towerblocks fell down in earthquakes recently (6 on richter registered).

      I fancy a new CX5 , Yeti etc (Bulgarian roads bad, SUV or pucker offroad 4wds give more comfort) – between a long warranty on diesel injection systems, suspension etc and shockingly high residual values on same in Germany make new attractive at 3.199% except for the floating rate :-(, also with new job I don’t want to waste vacation time importing cars.

      If we get a 2008 repeat, there would be plenty of ex-lease X5s etc auctioned off cheaply in England, but if they’re hellbent on keeping interest rates low despite rampant inflation – used car prices may stay high & I might not get burnt by rising rates.

  4. Shaun, thanks for the detail about Greece, some of that does’t make the mainstream media because it is complicated and obviously contradictory the recovery meme. The reason that Greece creates such a focus for the Troika is because it conveys the truth beneath the surface, a canary in the gold-mine of printed wealth. They fret quite rightly because they don’t want a future that looks like Greece but in a perverse irony that is the course they are on.

    It is sobering to see edicts tantamount to looking down the back of the sofa, hey it must be bad? I do my bit however and its not pop-corn from the corn fields of Athens?!# I have currants grown and dried from the Patras Region of Western Greece. It is genuinely difficult to find Greece produce but I like to help my fellow Europeans out. You can get them from Asda and the good news for Greece is that I have finished a bag, so I’m putting a signal out, I going to buy more currants! Now if you lot and specifically Forbin can stop buying pop-corn for 1 week we can all make a difference.

    Paul C

    • Hi Paul C

      I do not know what the cold turkey effects would be for Forbin if he gave up popcorn! Better I hope than trying to give up the spice in Dune….Oh and you had me checking the packet of raisins I bought the other day but no they were from South Africa.

      As to Greece it is just so sad to see on the one hand so much money being lent and yet so many suffering.

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