Yesterday saw something of a misfire for the monetary policy Bazooka of Mario Draghi and the European Central Bank. It was also a misfire for the Financial Times which put out an incorrect announcement five minutes early which begs a question as you see the ECB has repeated the mistake on its website.
the deposit facility will remain unchanged…… -0.2%
It sort of symbolised the day and something must have been in the air as agency after agency made mistakes. I have not seen anything like it since the 1990s when one news agency declared a German interest rate rise as another declared a cut and bedlam ensued! Just for clarity the deposit rate was reduced to -0.3% from December 9th. In terms of consequences well the Euro shot higher to 1.09, Euro area bond markets plummeted just as Mario was giving himself the credit for them rising, and equity markets fell too for a financial market clean sweep.
However there was quite a bit of news relating to the relationship between the ECB and Greece that slipped to some extent under the radar. Indeed Deputy Governor Vitor Constancio was woken up to give us some of the news which is a sign of the times. I use the number of times his afternoon nap is disturbed at ECB press conferences as a signal of trouble. If there is credit to be taken and easy results Mario holds sway if not what is often a hospital pass is swept out.
The Greek banks
The ECB has been supplying an extraordinary level of support for the Greek banking industry most publicly shown by the amount of Emergency Liquidity Assistance or ELA. From the Bank of Greece.
On 3 December 2015 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €77.9 billion, up to and including Wednesday, 16 December 2015, following a request by the Bank of Greece.
The reduction of €7.8 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks amid a reduction of uncertainty and the stabilization of private sector deposits flows, as well as the progress achieved in the recapitalisation process of Greek banks.
Quite a chunky reduction in something which the ECB had been reducing in thin slivers up to then. Also we have learnt to take care with gifts being given to Greeks so let us investigate further as after all “stabilization of private sector deposits flows” is not a great vote of confidence if you think about it.
This for the Greek banks has been rather like London buses. Do not worry if you miss one as another will be along in a minute. The latest one has been particularly problematic as after all there are only so many times you can tell people that a corner has been turned! Yesterday saw one in particular hit hard. From Kathimerini.
with National Bank (of Greece) suffering a widely anticipated 30 percent limit-down upon its return to the market with its new shares after its capital increase.
All the banks required further dilution of existing shareholders and as you can see Natioanl Bank of Greece shareholders were hit heavily again. Also Piraeus bank needed the help of the European Stability Mechanism.
Piraeus Bank requires additional state aid through the Hellenic Financial Stability Fund (HFSF), which is funded by the ESM. The first disbursement of €2.72 billion on 1 December 2015 covers such capital needs.
This consequence of this lead to this at the ECB press conference yesterday.
some politicians in Greece say that the shareholdings of the Greek State and the pension funds in Greek banks have become worthless because of the recapitalisation method imposed by the institutions. What is your view?
Ouch! Here is Vitor’s reply.
So there is in that respect not a problem of valuation of those public shares.
As Greek banking shares fell by another 10% yesterday shareholders will not think that! But apparently.
So the statement, that those public investments are worthless, is not correct.
Why is that Vitor?
(Because they) will benefit from any profits or dividends that the banks will get in the future.
These profits will have to be extraordinary at National Bank of Greece were shares have just been issued at more than a 90% discount and this of course comes on top of many other falls and discounts in the Greek crisis.
Greek banking liquidity
The mainstream media has moved on as this is no longer a matter for the headlines but towards the end of last month the numbers posed a question?From Reuters.
Business and household deposits dropped by 590 million euros or 0.5 percent month-on-month to 121.08 billion euros ($129.1 billion), to their lowest level since March 2003.
Thus the overall situation if we look at 2015 so far is this.
Greece saw a 42 billion euro deposit outflow from December to July.
What we learn is that the money went but so far at least has not come back which is probably why we are seeing a barrage of rhetoric from EU officials that “haircuts” are off the agenda now.
Official Interest-Rates and Reality
You might think that is there is anywhere that the new even more negative deposit interest-rate of the ECB will apply it is Greece. After all it has so much negative GDP,prices, and wages. Yet in an echo of one of the opening themes of this blog back in 2009 take a look at reality. From the Bank of Greece.
The overall weighted average interest rate on all new loans to households and corporations increased by 29 basis points from the previous month to 5.08%.
Depositors can also get some interest albeit not much.
The overall weighted average interest rate on all new deposits decreased by 7 basis points, compared with the previous month, to 0.62%.
So what is called the transmission mechanism for monetary policy is pretty much broken if we look beneath the hype.
Another problem for Greek banks
So often and particularly in my own country I report on banks getting a back door bailout via house prices (assets against the banks loan book) rising. However in Greece things are very different. From the Bank of Greece.
According to data collected from credit institutions, nominal apartment prices are estimated to have declined on average by 6.1% year-on-year in the third quarter of 2015. According to revised data, for the first and second quarters of 2015 apartment prices fell at an annual rate of 3.9% and 5.0% respectively, whereas for 2014 as a whole the average annual decline was 7.5%.
Or as Alicia Keys would put it.
I keep on
Please do not misunderstand me I am not arguing for house prices and another bank bailout what i am saying is that under current conditions how can the Greek banking sector support the real economy?
QE for Greece
I have written before that the ECB has its finger on the trigger of approving QE for Greece, or to be more specific it is dangling it as a carrot in front of the Greek govenrment.The quid pro quo would be some economic reforms. This will be a two stage process where Greek banks return to normal liquidity operations. Yesterday it dropped another heavy hint about this.
that could even happen before the conclusion of the review, if we would be close enough to that end of the review and we would be convinced that the review would become successful.
Sadly nobody had the wit to reply with how this affects the constant proclaiming that the ECB is a “rules based organisation”. Next would come admittal to QE.
What would it be worth? Well for holders of Greek bonds quite a lot as one might expect the ten-year bond yield to halve from the current 8%. For Greece itself then issuing bonds would be cheaper than otherwise, but and here is the rub, still much more expensive than going to the ESM.
The Greek financial system remains very troubled and a lot of time has been wasted in 2015. The ECB has a very difficult job as repairing the banks will first help hedge and vulture funds more than Greek investors and taxpayers. Also in spite of the proclamations of success the deposits that left have not returned.
Meanwhile the real issue is how the banking system can support the real economy where nearly 3 years after the “Grecovery” rhetoric began we see this. From Greek Statistics.
in the 3rd quarter of 2015 the Gross Domestic Product (GDP) in volume terms decreased by 0.9% compared with the 2nd quarter of 2015
The volume of retail trade (i.e. turnover in retail trade at constant prices) in September 2015, recorded a decrease of 3.2% compared with the corresponding index of September 2014, while compared with the corresponding index of August 2015, recorded a decrease of 8.5%.
The underlying index for retail sales is stuck firmly in depression territory at 69.6 where 2010 when “shock and awe” according to Christine Lagarde began was 100. So how is the too big to fail and banking bailout strategy going?