Central banks are supposed to stop bank runs and capital flight not feed them!

Last night was an extraordinary one in the development of the Greek crisis and let’s face it after some 5 years or so we have become somewhat numbed to events there. Some such as BBC Newsnight economics correspondent Duncan Weldon seemed to suggest we were heading for a deal  saying “a few optimistic straws are in the wind. ” However even he now admits it all fell apart. A more realistic view was that more posturing was likely on all three sides ( Europe, The International Monetary Fund or IMF and the Greek government). After all we have been supposedly “close” to a deal for weeks as that word moves into my financial lexicon for these times and frankly it has seemed much longer. Still I suppose the group Europe are pleased that their biggest hit continues to get free publicity nearly 30 years later.

It’s the final countdown
The final countdown
The final countdown
(Final countdown). Ohhh oh oh ohhhh
The final countdown.

Although there is a bit more food for thought in the part of the lyric quoted below.

We’re leaving together
But still it’s farewell

That makes quite a counterpoint to the famous line from Hotel California which sums up the Euro area attitude to Greece’s use of the currency.

Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

Deposit flight

We find ourselves returning to the subject of Mondays article so quickly and one reason for this is that what I feared was already in play before last night’s events. From Bloomberg.

Greek savers pulled more than 1 billion euros from banks in one day on Thursday, three senior banking sources told Reuters, with the pace of withdrawals gaining speed since talks between the government and its creditors collapsed last weekend.

The withdrawals between Monday and Thursday have reached about 3 billion euros ($3.39 billion), representing about 2.2 percent of household and corporate deposits held by Greekbanks at the end of April.

This is a different form of credit crunch as it is individual to Greece but these latest flows come on top of previous departures.

As you can see deposits have been fleeing Greece and it has increased the demand for cash too as presumably some money is now being stored in the equivalent of under the mattress as well as going abroad. Of course those are just the official figures which do not include the deposit flight from the beginning of May. They would look much worse now as flows have accelerated.

Just for clarity as I have been asked this on twitter the phrase capital flight is something of a misnomer. Yes it is capital flight from Greece but for the banks it is a loss of deposits rather than capital and is therefore a cash flow issue. This,of course poses its own problems as they have to reshuffle their own financial position as they are forced to hold ever more liquid assets so they can supply the cash withdrawals and transfers out. There has also been help from the central bank which I will analyse in a moment.

This must be a brake on bank lending in Greece which is one of the things it badly needs to help it escape an economic situation which is of a depression combined with a recession. Even before this latest phase the position was poor and I fear for what it is right now.

In April 2015, the annual growth rate of total credit extended to the domestic private sector remained almost unchanged at -2.4%, against -2.5% in the previous month.

On Wednesday the Annual Report of the Bank of Greece expressed the same fears.

The deterioration of economic sentiment indicators and financing conditions in the private sector suggest that the slowdown of the economy is likely to accelerate in the second quarter of 2015, putting the economy at risk for a renewed bout of recession.

Cars as cash vehicles

A comment yesterday pointed out that more than the usual number of new cars with Greek number plates are being seen in Bulgaria. It is true that against the recessionary and indeed depressionary trend in Greece car sales have pushed a fair bit higher in 2015. Up to the end of May they were 15.7% higher with the increase accelerating to 21.6% in May itself.

So cars seem to be a vehicle for moving cash. It poses all sorts of questions for the value of money at a time like this as of course they are a depreciating asset which usually depreciates substantially on the first drive. Desperate times indeed. It makes you wonder if some are round-tripping this by borrowing in Greece and then disappearing over the horizon in their car expecting some form of debt forgiveness.

Official help or ELA

The mechanism which is supposed to help in these circumstances is called ELA or Emergency Liquidity Assistance. As the second graph above shows it has been going inexorably higher recently as the central bank tries to stop the banking system from grinding to a complete halt. Every Wednesday the ECB sits down to review whether it should give the Bank of Greece permission to increase the ELA limit. In itself that raises fears that one week it may say “no” or perhaps more accurately “nein” and it poses real questions for the concept of “lender of last resort” in Greece. Let’s be clear here if I was Mario Draghi I would be asking for daily reports on the banking outflows as dealing with such matters is a fundamental role for a central bank. Anyway its hand was forced on Wednesday as it oiled the wheels one more time. From Bloomberg.

Greece received a 1.1 billion-euro ($1.25 billion) increase in ELA that took the cap to 84.1 billion euros.

This inexorable rise poses its own problems for the ECB which finds itself ever more exposed to the Greek banking system and indeed to Greece itself. This was something which until recently Mario Draghi was prone to boasting about.

So far, we have reached an exposure to Greece of €110 billion, which is the highest in the euro area in relation to GDP.

Well it is a fair bit higher now which may have led to something of a crisis of confidence at the ECB if this from last night is any guide. This is ECB Governing Council Member Benoit Coeure on Greek banks being able to open.

“Tomorrow yes. Monday I don’t know.”

Both he and whoever leaked this would be made to put on a jesters uniform and wear a clowns hat if I was in charge as this is exactly how you start or to be more precise in this instance exacerbate a bank run. Those wondering about the truth of this would have had a wry smile as the official denial came very quickly as of course we know what official denials mean! It is not as if Benoit Coeure does not have form as this happened only a month ago.

Hedge Fund Diners Get ECB’s Market-Moving News Hours Early

Time for him to do the decent thing and fall on his sword I think.

The consequence was to make everything worse including for the ECB itself as Kathimerini points out.

Sources said that the BoG (Bank of Greece) has asked for additional funding of 3.5 billion euros to cover the growing needs.

That is for this morning and the ECB Governing Council is discussing it right now. If it is the “rules-based organisation” it regularly claims to be then the teleconference should last only as long as it takes to say yes. On this road it has tied itself ever more into Greece without the backstop of being directly linked to and backed by the Greek Treasury. I guess ECB staff are crawling all over the collateral it has received from Greece right now hoping not to have to echo the phrase of “phantom securities” used by the Bank of England when it found that it has been gamed.

Comment

There is much to consider in all of this as the flaws in the structure of central banking in the Euro area come home to roost. Let’s face it you know you are in a bad way when the government of Vladimir Putin thinks there is something to be gained by offering “help”. The situation has developed so far that even the Euro supporting Financial Times has published a piece suggesting that there is another way.

Conventional wisdom holds that it would be an unmitigated disaster for Greece if it left the euro. This is, after all, why the country has continued to cling to the single currency despite the catastrophic decline in employment and output. But what if those costs have been grossly overstated?

Only five years too late and past the best moment but it would get Greece out of its current mess and remains the best chance for genuine reform or as Aretha Franklin put it.

Oh freedom (freedom), freedom (freedom), freedom, yeah freedom
Freedom (freedom), freedom (freedom), freedom, ooh freedom

Yeah, think (think) think about what you’re trying to do to me
Yeah, think (think, think), let your mind go, let yourself be free

Or as another part of Hotel California puts it.

Up ahead in the distance, I saw a shimmering light

Meanwhile the beat goes on for one of the players who helped cause this whole saga. From the FT.

UK govt picks Goldman for RBS and Lloyds deals

The tentacles of the Vampire Squid have us all by the throat.

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22 thoughts on “Central banks are supposed to stop bank runs and capital flight not feed them!

  1. Destroying Greece for the sake of neo-liberalism.
    This EU is a vile cancer; ruled by soulless bastards; the sooner we’re out, the better.

    • buzzin

      if the Greeks had a government with any clue as to the beast they had joined they would have done an “Iceland” 5 years ago.

      It not all about the idiot technocraps running the Brussels gravy train !

      Forbin

    • There ain’t no such neo-liberal agenda in Brussels. It’s just a traditional “let them eat cake” class of elitists wannabe aristocracy. Pigs feeding at the trough of corruption, Self enrichment & aggrandisement whilst impoverishing society just like the Russian nomenklatura.

      The only historically proven long term solution is real democracy and accountability. And that is a total anathema to the Edith Cresson class in Brussels ….

      • Yes. The UK govt sometimes offer real referendums. UK politicians can be voted out of office when they’re viewed to be rotten – like Hamilton & Aitken.

        There are many Brits whose jobs depend on Europe. The freedom of movement to work abroad is awesome. the majority of Eastern European immigrants to the UK that I know work hard and pay taxes. Yes there are some who abuse social welfare – but there are plenty of Brit freeriders who have no intention to ever work, abusing the system.

        Somehow, somehow the best option is to try move the EU towards an accountable democracy. To work together with neighboring countries for mutual benefit. But good neighbors shouldn’t use the CAP to steal from their peers.

        • Leaving this cesspool does not mean that we have to halt immigration from Eastern Europe, nor does it mean that Brits cannot work abroad.
          The EU with a trade in goods surplus of what? £7bn a month? and that’s JUST SURPLUS isn’t going to cause even the tiniest ripple of trouble, or millions of EU jobs would go, busting the whole system.

          I see clearly the benefits of European Union, but starving the Greeks is nothing like ” working together with neighbouring countries for mutual benefit”.
          This is economic destruction of neighbouring MEMBERS for political ends, and I want nothing to do with this horrific perversion of that aim.
          Furthermore, your idea of democracy, where you get the same policies regardless of which party is in power, does not suit my palate either.

          60% of benefits recipients ARE IN EMPLOYMENT.

        • I agree with therrawbuzzin – different parties – very similar policies. I don’t see that as Democracy, didn’t Ireland and Holland have in/out referendums? So…what’s the difference?

        • Buzzin. I have previously criticised UK policies, democracy etc – where I think it is justified. I invite you to try use the democratic process to get things improved. Alternately, if the UK is so horrible you have the freedom to leave ….

          When wages are inadequate to provide decent housing (benefits needed) clearly there is a problem. I strongly dislike my taxes being used to enrich the BTL brigade. My posts suggesting rent-capping laws should indicate how I feel about the cost of British housing. And I put my money where my mouth is – I left.

          I have also posted that I think Sarkozy, Juncker, Trichet, StraussKahn, Lagarde, Merkel etc should be prosecuted for illegal cross border bailouts, illegal state aid to banks and despicable conduct towards the Greek people. But remember that the megarich duopoly that ran Greece with impunity for many years should also be indicted for various financial crimes against the Greeks and European taxpayers. But running away from the EU and sulking won’t help. Trade deals are not fair, the big blocks abuse the smaller players and institute unfair rules – just try exporting agricultural produce to the EU or USA…

          Constructive suggestions how to improve the EU are welcome…

        • There is no democratic process which can provide change when all political parties implement the same policies, that’s not democracy, that’s electoral dictatorship, and why should I leave?
          It’s as much my country as it is Dave’s or Gideon’s.
          With the establishment owning and controlling all the msm, the only route to change is:

        • Simply check the gini co-efficient of first world democracies, compared to autocratic regimes. QED social justice is not served by violent revolution. Violent revolution involves the murder of innocents, like children murdered by IRA terrorist bombs, people never coming home from the World Trade Centre in New York. How many orphans came from Bin Laden’s evil ?

          The British FPTP system is very stable and change happens infrequently. But radical change happens when there is a mandate, for example Churchill’s post war loss and the implementation of the Beveridge report policies. Also you may not have noticed in Scotland, but Thatchers Tories were very popular in Southern England.(Excluding the poll tax) They stood up to NUM extortion, they rescued the sterling from crisis and they raised living standards of British workers. Houses were affordable in 1997, where are they now ? A problem is the lack of an effective centre left opposition who can work for the benefit of all Britons. Labour lost cause they’re fiscally incompetent and have policies that just don’t appeal / sound feasible to the majority. Bemoaning a lack of democracy sounds like sour grapes from a sore loser. Constructive action is proposing better policies and debating their case to try win votes ….

        • “….They stood up to NUM extortion,” and ensured consumers paid inflated prices for German and African coal once they had destroyed the UK coal industry, which, in turn, led power generators to build Gas fired power stations resulting in greater demand for Gas and pushing up Gas prices 10 years later.

          “they rescued the sterling from crisis” – which they had created!

          “Houses were affordable in 1997, where are they now ?” – About the same if my house is anything to go along with what my salary would be if I was still an employee.

          For the record I am apoloiticakl and whilstI agree that Labour has unrealistic fiscal policies, so does the Conservative Party – have you seen their grwth assumptions over the next 5 years. Ha ha ha ha ha ha ha ha ha ha .

  2. hello Shaun

    Isnt the bank protection scheme all local based so if the local CB goes tits up we have that unstable lifeboat?

    I guess we’ll learn today if the ECB really is the lender of last resort – do they understand that if they refuse then the world will not believe that they are ?

    What then for the Euro ? LMU all over again ?

    interesting times !

    Part of the blame I think is the endless optimism of the Greek government that there can be a deal , I suspect still that some kind of deal will be made so by end of August only the ECB will hold Greek debt , still time will tell

    How is Iceland these days ? apparently they no longer exist as no one compares what they did with whats happening in Greece . I wonder why …….

    oh silly me ! its the Banks again , isn’t it ?

    Forbin

    • Hi Forbin

      The bank deposit guarantee scheme of Greece is shown below.

      “The Hellenic Deposit and Investment Guarantee Fund (HDIGF) is the operator of the deposit guarantee and investment compensation schemes and is governed by law 3746/2009 (Government Gazette 27 A’/16 February 2009).”

      Where does it get its money from?

      “The HDIGF is mainly funded by contributions paid by participating banks, avoiding to burden taxpayers with the cost of bank default or resolution.”

      It latest figures are out of date on its website but according to it then it was in a position from its own resources to cover 2.5% of “covered deposits” in 2013.. So anything more would require it to go to the representatives on its board from the Bank of Greece and the Ministry of Finance.

      Rather ominously it seems to have been aligning itself with the Bulgarian deposit fund which if you recall was rather tardy in paying up when it was called upon.

      As to Iceland well it is heading out of capital controls just as Greece is being pulled towards them.

  3. Re – Greeks in Mercs.

    Greek cars aren’t a safe way to hide wealth from the taxman, reference: Italian cars being flogged cheap a few years ago. But they are convenient for transporting your purple notes away from Greek banks

    • Hi ExpatInBG

      What this shows is that at times of distress in a monetary system we see a form of barter in a way as cars are used as a way of transferring cash. It shows the losses some are willing to take as they depreciate quickly in the early days.

      Has the Bulgarian system settled down after the Corpbank scandal? I pointed out to Forbin that it seems to have linked itself in a cooperation sense with its Greek counterpart. Are the Greeks checking how you make big payouts?

      “Since the initial day of reimbursement, 4 December 2014, till 5:00 pm on 18 June 2015 107,870 depositors with Corporate Commercial Bank (in bankruptcy) have disposed with their guaranteed deposits to the amount of BGN 3 billion and 617.5 million.”

      • There is no standard price for cars, luxury or otherwise, so the depreciation from new to used may not be quite as severe as imagined.
        Furthermore, the nature of money-laundering, as that is what it would be, sees the gain of the clean, new, as worth the loss.
        Frankly, if it was me, I’d transfer my money out of the country electronically.

  4. Hi Shaun,
    Reading your piece today I found myself thinking of Mario’s “anything it takes” speech and pondering on what he meant. Perhaps his anything it takes plan was and is a 4 point one as follows:

    1. Bail out Greece with sufficient funds to just keep going.

    2. With part one in place arrange for French/German banks to divest themselves of Greek exposure possibly by having the ECB buying the Greek paper they hold thereby spreading (diversifying) the risk around the other EZ countries WHEN inevitable default arrives.

    3. With part 2 in place commence flooding the markets with QE purchasing 60 billion Euro of EZ bonds per month by way of preparation for Greek default and the associated market liquidity squeeze.

    4. Cut Greece loose.

    However another thought occurs which is that Greece now owes so much to the ECB that it is the ECB which has a problem, unless it sees this as a paper shuffling exercise sending the bills for the bad debts to the other 17 countries, oops, I mean 16 to shoulder their share of the losses.

    Of course, given that it (presumably) created the Euros lent electronically in the first place it could simply cancel them and hey presto the 160 or is it 320 billion never existed and modern monetary theory applies, but how would that affect Target 2 reserves?

    A final question and something to ponder on – do you know what value of Greek sovereign debt still lies with the private sector?

    Isn’t Greece currently looking for 7 Billion Euros? Doesn’t Greece have to repay 1.6 billion Euro to the IMF by 30 June with a further 6.7 billion due the ECB during July and August? So what’s the point of arguing over 7 billion when it will fail to satisfy the debt repayable over the next 8 weeks? It looks like the writing’s on the wall and you’ll get your way Shaun. Unfortunately I think you’re wrong in your assessment that Greece will do better on it’s own, although it would have, had it left and defaulted in 2010 but I very much hope I’m wrong for the Greek peoples sake. Neither of us will know the answer for at least 10 years after the default.

    • I fear you’re right about it being too late to save Greece, but, on the other hand, it is definitely not being saved by the neo-liberal programme.

      • Completely agree. Originally, the bail out should have been much bigger, the Greek politicians responsible for the debacle should have been jailed, a “dictatorship” of economists should have been put in charge of the economy tasked to get Greece healthy in 5 years using the much more generous funds that should have been made available at the time.

        When Greece was economically healthy (i.e. less than 80% national debt to GDP and a balanced budget), hand Greece back to the electorate and during the 5 year recovery identify whoever originally looked at the Greek books,recommending they be allowed to join the EZ and sack them for gross incompetence, banning them from holding any kind of job related to Government or finance related (and that would include a supermarket checkout operator) ever again.

    • Hi Noo2

      I have been wondering about the “whatever it takes” (to save the Euro) speech too (made by Mario Draghi back in the summer of 2012). I think he meant it back then and it included Greece but as things have developed the ECB has become first not so sure about Greece and then also worried about the size of its own involvement.

      As to private-sector ownership of Greek national debt Bloomberg ran some numbers in January

      ” Private owners now hold only 17 percent.” Who else?

      “These include euro-area
      governments (62 percent), the International
      Monetary Fund (10 percent) through its
      participation in the two bailouts, and the European
      Central Bank (8 percent), which purchased
      bonds in 2010 through its Securities
      Market Program. The remaining 3 percent
      are repurchase agreements and assets held
      by the Central Bank of Greece. It is unclear
      where losses on that portion would fall.”

      The IMF has been receiving some repayments (up until this month anyway…) so its share is shrinking and frankly that is for the better in my opinion.

      As to “my way” I think that of the options available it remains the best but sadly I agree completely that it would have been much better if it had been done back in 2010/11.

      As to Target 2 how do you eliminate debits without also eliminating credits?

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