Greece faces yet another credit crunch as capital controls begin

This morning we find ourselves considering a situation which the Euro area has told us is not possible. The recent accession of Lithuania to the Euro area led the European Central Bank to proclaim this.

The irrevocably fixed exchange rate is €1= LTL 3.45280.

It is the word “irrevocable” which poses more than a little food for thought right now as it reminds us of the new word of the credit crunch era called “unpossible” which is for something apparently even less likely than impossible. Of course in the twisted language of these times -especially from officials- the higher the rhetoric rating the more likely moves are in the opposite direction! The connection between Greece and the Euro does not look irrevocable after the events of the past weekend does it?

Even UK Prime Minister David Cameron seems to be on the case. From BBC Radio 4 Today.

If they vote no, I find it hard to see how that is consistent with staying in the euro, because there would be, I think, a very significant default and a very significant problem.

Also in an intriguing move the central bankers body the BIS (Bank for International Settlements) left Greece off its map of the Euro area in its latest Annual Report! What is the opposite of a redaction as they rushed to put it back in later editions? Some may be wondering if it was not necessary…

Even the Eurogroup of Euro area finance ministers joined the game in a way as they issued a statement from 18 nations not including one of its members (guess which one…?).

What about Greece?

The calling of a referendum on the latest Euro area austerity proposals by the Greek Prime Minister and then Parliament threw something of a spanner into the works. As we were left waiting until next Sunday for the vote and then result there were two issues which quickly came to mind. The first was the fact that Greece has to repay some 1.5 billion Euros to the IMF (International Monetary Fund) by 6pm Washington time tomorrow. The second as how the ECB -which has been propping up the liquidity of the Greek banks- would respond. We found that out yesterday afternoon.

Given the current circumstances, the Governing Council decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday (26 June 2015).

The message was along the lines of the boxer Roberto Duran “No Mas” statement when he ended the fight against Sugar Ray Leonard. Accordingly Greek banks would have to deal with future withdrawals and indeed ones which happened this weekend on their own. So we have another form of credit crunch which led to this announcement. From Kathimerini

ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.

This was especially awkward for the Greek Finance Minister Yanis Varoufakis who around 5 hours before had tweeted this.

Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept.

Apparently that did not stop the Greek systemic council from imposing them. Although if we return to the basic monetary policy that I discussed last week he does have a point with his first sentence. How can you have capital controls in a common currency? There is a clear failure here.

The ECB has found itself offering some odd rhetoric too. From RANSquawk

ECB Nowotny says Greece may not be able to pay IMF on June 30 but that doesn’t mean that it will default

Apparently even a default does not mean a default any more! It might be a good idea if somebody told Christine Lagarde of the IMF as she has been issuing various threats on that basis. Perhaps she does not want to be left holding the parcel of the largest default the IMF has ever had on her watch should the music stop.  Mind you after issuing a statement like the one below it makes you wonder how much reality reaches the upper echelons of the IMF these days.

I continue to believe that a balanced approach is required to help restore economic stability and growth in Greece……. The IMF is prepared to continue to pursue that approach with the Greek authorities and our European partners.

That “balanced approach” and “help” has collapsed the economy and created an economic depression in Greece.

The problem for the creditors and institutions

This is simply the amount of money that has been lent to Greece. Countries such as China and India which have increased their backing for the IMF in recent times are unlikely to be too pleased should it see its largest ever default which the Greek lending scheme would be. In effect Europe managed something of a takeover of the IMF by appointing (French) politicians to lead it and by the way that they have turned it from a balance of payments organisation to one dealing with fiscal issues particularly European ones. No wonder Christine Lagarde often seems rattled these days.

Mario Draghi and the ECB  face their own problems based on the scale of funds provided to Greece. I bet right now officials at the ECB are scanning the Greek collateral provided in return for much of the payments. Meanwhile Mario will be mulling the fact that a central bank needs to be linked to a Treasury at times like this. LorcanRK of Bloomberg put it more humourously as queues began at Greek ATMs on Saturday.

Anyone see Mario Draghi in any of the Greek ATM queues? I hear he wants to make a large withdrawal..

We are back to the old truism that if you owe a bank £1 it owns you but if you owe it £1 million then you own it. Of course the more modern version involves billions in these increasingly inflated times.

Remember around 3 years ago when I pointed out the problems created by the accounting assumption made by the ECB that all Euro area sovereign bonds would be repaid at par of 100?

Market Response

There is very little from Greece itself. Markets there are shut this week but some derivatives traded elsewhere are indicating falls of between 15% and 30% for Greek bank shares. The Euro dropped below 1.10 versus the US Dollar last night but has rallied since, perhaps in the style of Who wants to be a millionaire it was able to phone a friend. From Reuters.

The euro came off its lows on Monday as the Swiss National Bank said it intervened in the market to weaken the franc,

After initially falling heavily Spanish and Italian bonds have rallied back. Is it rude to wonder if the Swiss National Bank has parked its new Euros there? After all it can’t keep buying shares in Apple can it?

The German stock market is currently down about 3.5% today as we await the next developments.

Spare a thought for China

Having gone to all the trouble of cutting interest-rates yet again on Saturday the People’s Bank of China must have been disappointed to see its stock market fall again. Those pesky European Federalist Capitalist Imperialists…..


We are seeing another phase in the credit crunch that is ongoing in Greece as banks shut and withdrawals are limited. Although in a sign of the shambles that times like this create some banks seem likely to open today to allow pensioners to collect their pensions. This in itself reminds us of another way which is how long the Greek government can pay its bills and obligations for outside of the bailout structure. As we stand that ends formally tomorrow. Right now it would appear that filling your car with petrol or diesel has replaced withdrawing cash from banks as the thing to do as many Greek petrol stations have run dry.

Still Greece will receive an economic boost from all the journalists who have flown in and are presently on their way. So the hotel and restaurant industry can expect a boost from their expense accounts.

As to what happens next there is a lot of uncertainty at which times it is often best to see what the betting markets are doing. William Hill has stopped taking bets on Grexit as they became all one-way and Paddy Power is now pricing an 11/19 chance of a Grexit.

Oh and what is it about Robert Peston of the BBC and bank runs? From yesterday morning.

The European Central Bank’s governing council is expected to turn off Emergency Liquidity Assistance (ELA) for Greek banks at its meeting later today, according to well-placed sources.

He appears to be the ultimate insider aware of events that for example the French Prime Minister was denying. He is like a vampire waiting to sink his teeth into any banking collapse.


45 thoughts on “Greece faces yet another credit crunch as capital controls begin

  1. 1) the IMF will extend and pretend.
    2) the Greek people will vote Yes.
    3) Syriza will sign up to further the further cuts demanded of it, only it will be from a far weaker position.
    4) the Greek people will be debts slaves for a few more months.
    5)… See 1 above.

      • I disagree mickc. Though I don’t doubt the USA don’t want a door to be left open for Russia to step through, the impending Yes vote in Greece will leave the Greek government such a weak hand that the troika will gladly offer them the worst deal possible now and the Greek people will suffer more. The final result… regime change in Greece having made Syriza look like fools.
        The biggest tragedy in all this is that Syriza are still the Greek people’s only hope of ever getting out of the hole they’re in right now.

        • An interesting and very plausible outcome!

          We’ll see by the end of the week, but at this moment I wouldn’t put money on either outcome….at least not my own money!

  2. Shaun, the Troika is making this referendum a choice of whether or not Greeks want to stay in the Euro whilst the actual referendum is about accepting the terms of the ‘deal’. Most Greeks think it is about the Euro choice so once again propaganda will win the day. The Greeks I have spoken to believe that if you default you are automatically ejected from the Euro! The idea that a country has to voluntarily leave and that there is no mechanism to force it out is not at all understood. I expect that the Eurocrats fear just that, a bankrupt Greece still a Euro member!

    • Pavlaki, the Eurocrats and others fear more than that, from Reuters:

      “Despite the hardening of positions, officials around Europe and the United States made a frantic round of calls and organized meetings to try to salvage the situation.

      U.S. President Barack Obama called German Chancellor Angela Merkel, and senior U.S. officials including Treasury Secretary Jack Lew, who spoke to Tsipras, urged Europe and the IMF to come up with a plan to hold the single currency together and keep Greece in the euro zone. The German and French governments announced emergency political meetings.”

      Not the actions of politicians without anything big to lose. (Excuse the double negative, especially as it has the opposite meaning to how it is used in Greek.)

      I’m going to make sure that I have some cash too.

  3. Hi Shaun.
    So it IS a crisis, which suggests that we are not all that well isolated from contagion.
    It won’t, however, be a default, just like in 2012 it wasn’t a default, in fact, if Greece never pays another €1 to its creditors, it will not be called a default, even though both are defaults, because the banksters are petrified of the derivative consequences, which suggests that we are not all that well isolated from contagion.

    What’s the surest way to increase tax evasion?
    Make the Greeks shut their banks and do all business in cash.

    It is pretty obvious that the EU is trying for regime change in Greece, just like it did in Ukraine, with that supine quisling Samaras and his cohorts, waiting in the wings, just like Poroshenko.
    These scum have shown that blood on their hands is of no consequence, and I pray that they are held to account for their actions.

    • I agree therrawbuzzin but I think the Eu is in for a nasty shock as to the Greek people’s choice of “alternative regime”. Remember they elected Syriza on an anti- austerity program. I don’t think they’re in any mood for backing down. If I were an EU official I would be looking for a way back now.

      • I wish I shared your confidence, however, in the last national elections, as is usually the case, fewer voted for Syriza than against it.

        Juncker is a liar, by his own admission.

        TPTB are crapping themselves.
        That suggests to me that Grexit = meltdown.

    • Poland has prospered in the 25 years since Gorbachev realised that spending all Russia’s money on nuclear weapons was dumb and unsustainable. Ukraine and Belarus’s subsidised Russia energy energy has not made them rich, quite the opposite. Russia, Belarus and Ukraine have horrendous ratings from transparency international. Poland does quite well. An economic comparison of Moscow vs Brussels should research why Poland is prospering, rule of law is improving, quality of life is improving and average salaries are over 950 euro per month. Belarus average salary under 350 euro per month. Ukraine average salary under 200 euro per month. (Source Trading Economics)

      Your dogma from 2000 miles away has no bearing on Eastern European reality. Poles are 6 times richer than Ukrainians. This and Poland’s lower corruption (source transparency intl) are why a majority voted Poroshenko. Posting baseless nonsense devalues your other postings and further nonsense only re-inforces this.

      If you want to look for blood on hands, check out the names of the KGB murderers enforcing the East Berlin shoot to kill defectors policy. there are over 800 well documented deaths from the Berlin Wall. And if that ain’t enough to disillusion your thoughts, or convince other readers to question your sanity – read this

  4. Hello Shaun,

    dunno , this seems more politics than economics

    So is or is it not the lender of last resort , that ECB ?

    and by refusing to it the lender of last resort , what does that say about the economics of a single currency ?

    strange times indeed


    • Hi Forbin

      You are entirely right that the ECB has become a political animal and has intervened when it should not. Although I have a tinge of sympathy as of course the politicians of the Euro area have left it a very difficult job, and the major part of the blame is theirs.

      As to Lender of Last Resort (LOLR) I have written many times on here that I have my doubts about the ECB in this role. This issue with Greece proves my point as the truth is that the central bank has to back its banking system if not individual banks. But with its stress tests it keeps telling us that the banking system is fine! On and on and on it goes.

  5. Great column as usual, Shaun, and great comments from Pavlaki and others. You piqued my curiosity when you asked what is the opposite of “redaction”. There doesn’t seem to be one, but logically it should be “unredaction”, since “unredacted” has been accepted for some time as the opposite of “redacted”. For example, there is this sentence from the Guardian: “A Twitter user has now published a link to the full, unredacted database of embassy cables.” So I think what the BIS did with the map in their annual report could be called an “unredaction”.

    • Hi Andrew and thank you

      I shall have to try hard so that I do not read it as un red action…

      However I have grown to quite like “unpossible” which covers the official view on a departure from the Euro quite nicely. As to the BIS I cannot avoid smiling at the thought that after missing Greece out then putting it back we may see a future un-unredaction……

  6. Help me out here Shaun. There was a bit of a twitter spat about whether Peston overplayed his report, as support was “frozen at previous levels” rather than “stopped”. Peston’s defence seemed to be that since most of the money had already been disbursed then a freeze effectively was the same as cutting the Greek banks off. Can he claim a moral victory for his scoop or was he overcooking things as his critics claim?

    • Edited twitter spat highlights:

      European Central Bank to turn off Emergency Liquidity Assistance to Greek banks, sources tell me. See blog imminently

      — Robert Peston (@Peston)

      The idea that the ECB is about to “switch off” Emergency Liquidity Assistance to #Greece, as per reports today, is bonkers (1/2)

      — Ed Conway (@EdConwaySky)

      As expected & contrary to some reports, ECB freezes, rather than “turning off”, emergency support to Greece. Tough rather than apocalyptic

      — Ed Conway (@EdConwaySky)

      As I said earlier, the ECB is not providing any additional Emergency Liquidity Assistance to Greek banks. Huge pressure for capital controls

      — Robert Peston (@Peston)

      I’m mystified by why some of you are criticising me. I said ELA would be turned off. That is what has happened. See my earlier tweets

      — Robert Peston (@Peston)

      • Hi MyBurningEars and welcome

        Yes the original BBC reports did overstate the case. It is always hard to track back with them as they have a habit of to use the word of the day “redacting” things. They used the word “end” originally which I repeated then corrected on my Twitter output, if Sunday mornings keep being like that I may have to restrict my beer consumption on a Saturday night! 😦

        Shaun Richards ‏@notayesmansecon Jun 28
        Just to be clear the #ECB no doubt wishes it could end #ELA to Greece but is more likely to end EXTRA ELA than what @peston is reporting

        As to Robert Peston in my opinion he does not understand these matters and is therefore something of a loose cannon in the original naval sense……

        • Thanks for the welcome Shaun. You have welcomed me before, at least when you were on MindfulMoney! I read the blog before you were there, too, but can’t remember if I ever commented.

          Robert Peston is exceedingly well-informed. I get the feeling he is really a “business” rather than “economics” guy, but there aren’t a heck of a lot of journalists who really are economics people.

  7. Jean-Claude Juncker, has said he feels “betrayed” by the “egotism” shown by Greece in failed debt talks.

    pot > kettle > black


    • Going direct to the Greek people over the heads of their ELECTED govt.
      Who do they think they are?
      What right do they think they have?
      Egotistical, impertinent upstarts!
      Do they think that no-one in Britain is watching?
      The EU-sceptics, of which the EU has made me one, will have a field-day with this.

      Keeping Greece in must be crucial, as they are risking alienating the British left as well as the right.

    • Would this be the same JCJ who said ‘when it gets serious you have to lie’ ? This is serious so I can only assume that once again he is lying about most things!

      • He is now urging Greeks to vote YES to measures which the Eurozone finance ministers say are no longer available!

  8. Hi Shaun
    For all the speculation we won’t know for some time
    if this is the “Beginning of the end” moment. If it’s not and
    TPTB pull an enormous bunny from an incredibly large hat,
    then it could be a very smelly road ahead.
    Could you see the formula e’s from your window?

    • Hi JRH

      No I live on the ground floor so I couldn’t. With the barriers used you would need to be on an upper floor to look down on it. As to the concept I was very disappointed. I have no great animosity towards Formula E but a heritage park is not the place for it. Not only has there been great disruption to its normal use but on a glorious peak summer day like today it was shut.

      Paul Krugman would no doubt be happy via the boost to GDP whilst my concern is for quality of life and well-being.

      On the happier side for those who have never been there, Battersea Park is one of the gems of London.

  9. The Greek people got into this mess by allowing themselves to be bribed with borrowed money by the politicians who wanted to keep their noses in the trough. BAD. Herr Junker has promised the Greek people that if they vote Yes untold riches will come their way (or in the way of politicians) from Structural Funds which are supplied by the member nations almost all of whom are in deficit so that is borrowed money also. This is GOOD. Perhaps Shaun can explain where I got this wrong?

    • Hi Peter and welcome to my corner of the web

      Another way of looking at the Greek crisis is that Greece failed to tax its wealthy oligarchs and its establishment have manipulated the country to their own ends. The ordinary Greek now finds him or herself facing the consequences of the lies that they have been told.

      I am not sure how the original bribery can be BAD but being bribed by Herr Juncker is GOOD! As to him he came up with some fantasy off-balance sheet scheme a while ago that amounted to 315 billion Euros or so (he was rather vague). I am not sure that even he believes it.. It might be like the debt relief promised for Greece that always seems to be just around the corner.

  10. Hi Shaun, I wonder if Lagarde’s statement of a “balanced approach” being pursued by the IMF with it’s partners is some kind of veiled criticism of the lack of balance demonstrated by Greece in that it failed to carry out it’s promised reforms and she is covertly suggesting that had it done so Greece would not be in this mess now?

    Meantime, I believe all these actions of statements from Euro Area finance ministers excluding one and the BIS antics are calculated bullying tactics agreed by the authorities to suggest to Greece that they are capable of ejecting it and ignoring it and have already started ignoring Greece as preparatory work for the ejection. This is the worst form of bullying – alienate your prey by excluding them from the decision making process and let them see you are excluding and ignoring them in your considerations.

    If I were Greek I would be filled with such a rage at these antics I would vote no, demanding that we leave, default, refuse to repay a cent and then completely ignore the EU, even though I knew it would destroy my country.

    • Hi Noo2

      The problem for the IMF complaining about Greek underperformance on the reform front is all those “on track” statements it made itself. It is a bit rich to accuse someone else of being dishonest if you have too.

      As to voting No, I would do so as well except that I see a lot more potential hope. A lot can happen in a week…

  11. If the Troika had only read this blog and the comments that normally follow they’d have known a long time ago what was coming.

    The cynical part of me might argue they bought the banking sector a bit of time to prepare but the realist knows they’re stupid enough to believe in their superiority and had indeed found a way to circumvent gravity.

    Good stuff as ever Shaun.

  12. Shaun, just read the letter from the President of the European Council to Tsipras, copied to Draghi, Djisselbloem et Al basically saying that there is no longer an offer of final help to be discussed but that if Greece wants to apply for help they can do so. Not much point in a referendum on an offer that no longer exists, is there?!

      • That letter is dated today so they have pulled the plug and shut the door on Tsipras. He will have to reapply! Now why would they do that?

        • Hi Pavlaki,

          if theres to be a referendum, called by an obviously misguided government, how do Brussels have their two-peneth on the wording I wonder …….

          Excellent posting Shaun.

    • Hi Pavlaki

      I wanted to mention something we often discuss. The Euro dropped like a stone but then leapt back up Lazarus like today! Over 1.12 versus the US Dollar now and it has pushed the UK £ back to 1.40. Perhaps without Greece it might be considered to be even more of an ersatz Deutschemark

      • That’s one big point.
        The fewer Club-Med countries involved, the higher the value of the Euro.
        Not only would their absence hurt Germany, but if Italy and Spain in particular were to go, how would France cope with a Euro at Pound parity $1.60 or even higher?

  13. Hi Shaun,

    A late post, but I thought I’d post some implications of default. People who depend on the state will suffer. Some 18 years after the Bulgarian Communist Party overspent, overborrowed, wreaked economic destruction and defaulted, normal pensions are 75 euro per month. Teachers salaries are reported to average 430 euro per month and the public medical system is being ground into the dust.

    I heard from a Brit friend who stayed in a Greek hospital, that it was necessary to pay for your bed sheets and get someone to buy food and bring it to you – and that was 20 years ago.

    Anyway – the money has been borrowed, and the younger Greek generation (those that don’t emigrate) will end up suffering one way or other. Why are the UK establishment so slow to admit the obvious consequences of continuous borrowing and overspending ?

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