The Greek bailout saga goes on and on with deadline after deadline being passed. If we wish to know what happened over the weekend we find out quite clearly from what has happened in Greek financial markets this morning.
@RANsquawk 2Y yields +110 bps, Greek ATG index -6.3% and Greek Banking Index -2.8% following latest breakdown in talks.
So bond yields up and shares down. Actually I think that they were underplaying the fall in Greek banking stocks.
@ReutersJamie Greek bank stocks -12% at the open. That follows -12% on Friday.
If we stick with the banking stocks it is helpful to introduce some perspective. If we look back five years which takes us back to just after the “shock and awe” bailout so beloved back then by Christine Lagarde I note that its share price was around Euros. It then pushed above 2 Euros. If you consider all the money which has been poured into the Greek banking sector to keep its nose above water it is rather instructive to note that the share price is now 0.26 Euros and the one-year return is -62% according to Bloomberg. It will not exactly be a fun General Meeting on the 26th will it?
Of course shareholders have had to give up much of their ownership of the bank as the Hellenic Financial Stability Facility (which now owns ~70%) stepped up to the plate. Have you noticed that organisations with “Financial Stability” in their title are invariable involved in anything but? Unless of course you find this below to be stability.
The balance includes the Fund’s investments in the 4 systemic banks following the completion of their recapitalization. As of 31/12/2014 the Fund’s portfolio fair value amounted to € 11,622.1m (31/12/2013: € 22,584.7m).
So it just about halved in 2014 and 2015 so far is looking very poor too. Not exactly an environment where we would be expecting the Greek banks to support Greek businesses and offer loans to consumers is it? For today’s purpose of looking at capital flight it is clear that a factor is the heavily damaged banking sector which in spite of the substantial sums spent bailing it out still looks like a patient in intensive care.
This can take many forms but there is a litany of issues for Greece. For example economic performance is an obvious issue with the economy having shrunk by around a quarter since the onset of the credit crunch and Euro area crisis. Indeed things are still struggling as the whole concept of “Grecovery” becomes a very unfunny joke.
Available seasonally adjusted data indicate that in the 1st quarter of 2015 the Gross Domestic Product (GDP) in volume terms2 decreased by 0.2% compared with the 4th quarter of 2014.
So as yet another recession becomes a feature of an ongoing economic depression we also see that there is political turmoil. This is not internal as Syriza have formed a new government what I mean is that Greece has become so dependent on the bailouts it has received that it needs ongoing support from its Euro area partners. As it has become more dependent on these the uncertainty has risen which has been exacerbated by the fact that meeting after meeting and deadline has passed with no deal. In fact the situation has got more fractious.
Also the Greek government has had to take measures to improve its cashflow. For example it has twice called on local and municipal governments to pass any surplus funds to it. Also it has delayed repayments to the International Monetary Fund to the end of the month. In a fevered atmosphere such developments will cause investors and depositors to fear for the safety of their cash.
Backing this up comes the now apparently interminable cycle where negotiations between the Greek government and what used ti be called the troika and now calls itself the institutions start and break-down again. The word “close” has gone into my financial lexicon for these times as we it begins to feel like we have been close to a deal forever! How many crunch weeks can you actually have? Such thoughts remind us again of this from Otto Von Bismarck and Jim Hacker.
Never believe anything until it is officially denied
Thus we see a situation where reality and the official presentation of it are diverging widely and we get to the bit which is where human psychology steps in. On this road rather than precise mathematical calculations we find ourselves discussing fear, uncertainty and indeed contagion. In a way this famous quote from President F.D Roosevelt is both true and untrue.
the only thing we have to fear is fear itself
Yes fear is a factor here but as I have described above it is far from the only one. On this road depositors move into a situation described more accurately by the trailer from the remake of the film The Fly.
Be Afraid, Be Very Afraid.
On that particular thought I present this headline from the Financial Times yesterday.
Greece running out of options to avoid capital controls
The Central Bank
Deposit flight involves in one form or another a failure of central banking. It can come from a currency collapse whether real,expected or both but that is not true here as the other Euro nations are not suffering from deposit flight. Regular readers will be aware that I have argued for quite some time that the ECB (European Central Bank) has flaws right at its heart and we are seeing an example of this right now. Putting this another way who is the Lender of Last Resort in Greece?
If you say it is the Bank of Greece you have the problem that it needs ECB permission to do certain things (Emergency Liquidity Assistance or ELA and Treasury Bill limits). If you say it is the ECB then why is it imposing strict ELA limits via the Bank of Greece? Indeed the concept of the weekly ELA limit has the seed of its own destruction written into its very soul. Something which is a sword and shield to beat away the risk of banking contagion has with it the fear that it can be withdrawn on any Wednesday the ECB Governing Council chooses in the way that it did with Cyprus.
The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.
Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.
This precedent poses its own problem as depositors note that there is quite a high danger of an EU/IMF programme not being in place in Greece. For now the ECB is unlikely to pull the ELA line. I would argue this for two reasons. Firstly it wants somebody else to take the blame. Secondly there would be something of an own-goal about this as it has some 6.6 billion Euros of Greek bonds which are due to be repaid in July and August so it has a clear interest in the stalemate continuing.
Also the numbers themselves are an issue as the amount of ELA rises and rises. Last week the ECB raised the limit by 2.3 billion Euros to 83 billion. Here we see the contagion issue as what is on its own a good thing also poses the question why was so much needed this week? Has the deposit flight increased? Also that is a lot of money when you consider that this phase of ELA only began in January.
Deposit flight itself
The simple fact is that deposit flight creates deposit flight as of the two human investing motives fear and greed the former takes charge. Hence the situation reported on by Kathimerini on Saturday.
Deposits in the Greek credit system have dropped from 164 billion euros at end-November to just 128 billion euros today.
Just when Greece needs a boost to credit and liquidity it has seen quite a drop in the other side of the balance sheet of around 22% so far. As fear begats fear mostly symbolised in the media these days by Greek citizens being pictured at ATMs the falls look set to continue. As they do so then the level of deposits and the ELA support provided by the central banks will get ever nearer as the system gets ever more unbalanced.
It is a grim feature of Greek economic life that seven years after the credit crunch hit the world that Greece is having its own domestic credit crunch via deposit flight. This does not have one of the features of deposit flight which is a collapsing currency because Greece shares its with a much larger group. But the price being paid for this is that its central bank is rather a fumbling lender of last resort and this is a case where the aphorism “time is money” certainly applies.
Having a normal central bank is not a cure-all as for example the collapse of Northern Rock in 2007 showed. But after a few misfires Mervyn King and the Bank of England stepped in decisively and the panic period was mercifully short. What the Greek deposit flight crisis lacks is anything like this from ECB President Mario Draghi.
whatever it takes…
Meanwhile quite a squeeze is being applied to the Greek economy by all of this as the soil required for deposit flight gets tilled over once again. Or as Jay-Z via the musical Annie put it.
It’s the hard knock life…
It’s the hard knock life..
It’s the hard-knock life for us
It’s the hard-knock life for us