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?
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.