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! “
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.
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.