European Central Bank monetary policy and Greece

The Greek saga has now continued for over five years and it has managed to produce an economic depression to rank with the falls of the Great Depression of the 1920s and 30s. At the beginning the European Central Bank was relegated to the back as Euro area politicians proclaimed their “shock and awe” program which produced the disaster that has unfolded since but very quickly it was required to take action. In the melee which has followed it is easy to forget that a type of Quantitative Easing began in Greece back in May 2010 as the ECB purchased its government bonds. The official view was that it was not QE because there was a weekly sterlisation auction to withdraw the liquidity created but this ignored various effects. Firstly the Greek bond market was supported, secondly holders of Greek bonds (banks for example…) were given a taxpayer-funded exit,and thirdly whilst some funds were withdrawn they were across the Euro area rather than specific to Greece. Also the liquidity withdrawal was of weekly funds as opposed to the 3/4 year maturity of the bonds purchased and that matters. You do not have to take my word for it as the Federal Reserve and Bank of England think so otherwise they would never have instituted Operation Twist style strategies which depend on precisely that.

So there was a time when the ECB was a friend to Greece if I may put it like that. There were also other programs such as the trillion Euro LTROs (Long-Term Repurchase Operations) which indirectly benefited Greece as well as the cut in the main interest-rate to -0.2%. However times have changed and it is now operating expansionary monetary policy elsewhere but has been keeping the monetary sector in Greece on a much shorter leash.

Euro area monetary policy

This is very accommodative right now. In addition to the measures described above the ECB commenced a formal program of QE in January. Up until this date it had a couple of relatively minor programs but the effort since has been expanded to 60 billion Euros a month and now includes sovereign bonds.As of the 19th of June some 182.2 billion Euros had been spent on operations in this area.

Today’s update on monetary data does show how these sums are in some instances flooding into the Euro area monetary system.

the annual growth rate of M1 increased to 11.2% in May 2015, from 10.5% in April.

However as I have discussed before as we move to wider monetary aggregates the impact fades considerably.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in May 2015, from 5.3% in April 2015.

If we move to the area of credit the numbers are much lower.

Among the components of credit to the private sector, the annual growth rate of loans increased to 0.5% in May, from 0.0% in the previous month (adjusted for loan sales and securitisation , the rate increased to 1.0%, from 0.8% in the previous month).

Indeed for businesses the situation has in fact deteriorated.

The annual growth rate of loans to non-financial corporations stood at -0.3% in May, compared with -0.4% in the previous month.

As you can see the ECB is making an extraordinary effort which as we go into the wider measures of the monetary system fades away quite fast. It has produced a more clear cut rise in another area but I will let readers decide if this is a success or not.

The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.4% in May, from 0.1% in the previous month.

Perhaps it is copying the policy of the Bank of England which enjoys pumping up the housing market. As an aside this is an area which is also awkward for the ECB as of course if we look at Spain which has seen official estimates of annual economic growth vary between 3.1% and 4% this week what is does not need is a new housing related boom.

Accordingly we see that even with what would only a few short years ago have seemed an extraordinary effort the ECB is seeing patchy results especially if we recall that it had expansionary policies in place before its new QE effort. However the tap is definitely tuned on.

What about Greece?

Here we have a complete contrast in terms of monetary action especially as this is the Euro area country you might think would most benefit from a monetary boost. This point was made in the Economist magazine by its Finance Minister Yanis Varoufakis back in late January.

Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.

By all three measures Greece would be at number one in the charts rather than being excluded. There are a couple of awkward issues here because Greece has already benefitted from the  QE style purchases by the ECB discussed above which is one of the reasons it is not active there now. Put simply it cannot buy the same bonds twice! Rolling the bonds over on maturity would not only look like debt monetisation it would be.

In spite of the other expansionary monetary efforts we see that the Greek money supply continues to shrink. Todays’s official data brings us up to the beginning of this month and it does not make good reading.

Total deposits at Greek banks which were some 159.6 billion Euros at the end of November had fallen to 125.2 billion at the end of May. If we move to the household sector alone deposits fell from 136.5 billion Euros to 111.8 billion over the same period. If we look at May on its own then the Greek household sector withdrew some 3 billion Euros from Greek banks. Putting it another way this is what economic and finance text books mean when the use the phrases capital flight and deposit flight. Actually we are in fact simply in a faster phase of it because is we look back to the end of 2009 total deposits at Greek banks were 234.5 billion Euros.

Thus if we look at a type of pure monetarism we are left with a very troubling though because the original crisis with its deposit falls was followed by an economic depression. So further falls which we believe have accelerated even more in June point to a grim economic future for Greece.

The ECB has a specific policy to combat this which is called ELA (Emergency Liquidity Assistance). But the way that it grudgingly gave weekly increases to the amount of ELA only made things worse in my opinion because it gave the impression that it could stop doing so. Frankly the ECB undermined its own actions by doing this and something which was supposed to calm the crisis in fact exacerbated it. Indeed in something of an irony it was forced into a volte face with a change to daily announcements and actions. Today was better in the sense that no increase was required but of course the money that can leave probably already has.

Comment

The founders of the Euro area left its central bank with quite a list of problems. For example the UK has regions with economic problems but by contrast it is a nation-state with fiscal and political union.Now here is a really dark thought for you which is that some Euro area supporters may not be that upset over the Greek crisis as it provides an opportunity to press for exactly that where fiscal union creates a federal state. As Frances Coppola points out below something along those lines appeared on Monday.

Today, the five Presidents – European Commission PresidentJean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup,Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz – have revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete it by latest 2025

This has been added to by Euro area politicians who put a fiscal squeeze on Greece when it was already in crisis. As I discussed only on Wednesday that seems to be the plan going forwards too.

However if we return to pure monetary policy we find that the ECB is pursuing what it considers to be an extremely expansionary policy except that it is not reaching Greece. Putting it the words of Governor Carney monetary policy there looks “maxxed-out”. It is to use a past analogy “pushing on a string” as fear offsets its efforts. As the chance of capital controls being introduced rises ECB policy gets undermined as what Keynes called “animal spirits” take charge. What a mess!

A Video Version

I was interviewed by Kumutha Ramanathan of World Finance magazine on Tuesday on the subject of Greece and for those who prefer a video analysis it is shown below.

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.

#ECB said to plan Emergency Greek aid call amid bank run bloom.bg/1SsV1Cn #Greece #Grexit http://t.co/7j08e5HIbH—
Holger Zschaepitz (@Schuldensuehner) June 19, 2015

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.

What are the features of capital or deposit flight in practice?

The Greek bailout saga goes on and on with deadline after deadline being passed. If we wish to know what happened over the weekend we find out quite clearly from what has happened in Greek financial markets this morning.

@RANsquawk 2Y yields +110 bps, Greek ATG index -6.3% and Greek Banking Index -2.8% following latest breakdown in talks.

So bond yields up and shares down. Actually I think that they were underplaying the fall in Greek banking stocks.

@ReutersJamie  Greek bank stocks -12% at the open. That follows -12% on Friday.

If we stick with the banking stocks it is helpful to introduce some perspective. If we look back five years which takes us back to just after the “shock and awe” bailout so beloved back then by Christine Lagarde I note that its share price was around Euros. It then pushed above 2 Euros. If you consider all the money which has been poured into the Greek banking sector to keep its nose above water it is rather instructive to note that the share price is now 0.26 Euros and the one-year return is -62% according to Bloomberg. It will not exactly be a fun General Meeting on the 26th will it?

Of course shareholders have had to give up much of their ownership of the bank as the Hellenic Financial Stability Facility (which now owns ~70%) stepped up to the plate. Have you noticed that organisations with “Financial Stability” in their title are invariable involved in anything but? Unless of course you find this below to be stability.

The balance includes the Fund’s investments in the 4 systemic banks following the completion of their recapitalization. As of 31/12/2014 the Fund’s portfolio fair value amounted to € 11,622.1m (31/12/2013: € 22,584.7m).

So it just about halved in 2014 and 2015 so far is looking very poor too. Not exactly an environment where we would be expecting the Greek banks to support Greek businesses and offer loans to consumers is it? For today’s purpose of looking at capital flight it is clear that a factor is the heavily damaged banking sector which in spite of the substantial sums spent bailing it out still looks like a patient in intensive care.

Underlying problems

This can take many forms but there is a litany of issues for Greece. For example economic performance is an obvious issue with the economy having shrunk by around a quarter since the onset of the credit crunch and Euro area crisis. Indeed things are still struggling as the whole concept of “Grecovery” becomes a very unfunny joke.

Available seasonally adjusted data indicate that in the 1st quarter of 2015 the Gross Domestic Product (GDP) in volume terms2 decreased by 0.2% compared with the 4th quarter of 2014.

So as yet another recession becomes a feature of an ongoing economic depression we also see that there is political turmoil. This is not internal as Syriza have formed a new government what I mean is that Greece has become so dependent on the bailouts it has received that it needs ongoing support from its Euro area partners. As it has become more dependent on these the uncertainty has risen which has been exacerbated by the fact that meeting after meeting and deadline has passed with no deal. In fact the situation has got more fractious.

Also the Greek government has had to take measures to improve its cashflow. For example it has twice called on local and municipal governments to pass any surplus funds to it. Also it has delayed repayments to the International Monetary Fund to the end of the month. In a fevered atmosphere such developments will cause investors and depositors to fear for the safety of their cash.

Backing this up comes the now apparently interminable cycle where negotiations between the Greek government and what used ti be called the troika and now calls itself the institutions start and break-down again. The word “close” has gone into my financial lexicon for these times as we it begins to feel like we have been close to a deal forever! How many crunch weeks can you actually have? Such thoughts remind us again of this from Otto Von Bismarck and Jim Hacker.

Never believe anything until it is officially denied

Thus we see a situation where reality and the official presentation of it are diverging widely and we get to the bit which is where human psychology steps in. On this road rather than precise mathematical calculations we find ourselves discussing fear, uncertainty and indeed contagion. In a way this famous quote from President F.D Roosevelt is both true and untrue.

the only thing we have to fear is fear itself

Yes fear is a factor here but as I have described above it is far from the only one. On this road depositors move into a situation described more accurately by the trailer from the remake of the film The Fly.

Be Afraid, Be Very Afraid.

On that particular thought I present this headline from the Financial Times yesterday.

Greece running out of options to avoid capital controls

The  Central Bank

Deposit flight involves in one form or another a failure of central banking. It can come from a currency collapse whether real,expected or both but that is not true here as the other Euro nations are not suffering from deposit flight. Regular readers will be aware that I have argued for quite some time that the ECB (European Central Bank) has flaws right at its heart and we are seeing an example of this right now. Putting this another way who is the Lender of Last Resort in Greece?

If you say it is the Bank of Greece you have the problem that it needs ECB permission to do certain things (Emergency Liquidity Assistance or ELA and Treasury Bill limits). If you say it is the ECB then why is it imposing strict ELA limits via the Bank of Greece? Indeed the concept of the weekly ELA limit has the seed of its own destruction written into its very soul. Something which is a sword and shield to beat away the risk of banking contagion has with it the fear that it can be withdrawn on any Wednesday the ECB Governing Council chooses in the way that it did with Cyprus.

The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.

Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.

This precedent poses its own problem as depositors note that there is quite a high danger of an EU/IMF programme not being in place in Greece. For now the ECB is unlikely to pull the ELA line. I would argue this for two reasons. Firstly it wants somebody else to take the blame. Secondly there would be something of an own-goal about this as it has some 6.6 billion Euros of Greek bonds which are due to be repaid in July and August so it has a clear interest in the stalemate continuing.

Also the numbers themselves are an issue as the amount of ELA rises and rises. Last week the ECB raised the limit by 2.3 billion Euros to 83 billion. Here we see the contagion issue as what is on its own a good thing also poses the question why was so much needed this week? Has the deposit flight increased? Also that is a lot of money when you consider that this phase of ELA only began in January.

Deposit flight itself

The simple fact is that deposit flight creates deposit flight as of the two human investing motives fear and greed the former takes charge. Hence the situation reported on by Kathimerini on Saturday.

Deposits in the Greek credit system have dropped from 164 billion euros at end-November to just 128 billion euros today.

Just when Greece needs a boost to credit and liquidity it has seen quite a drop in the other side of the balance sheet of around 22% so far. As fear begats fear mostly symbolised in the media these days by Greek citizens being pictured at ATMs the falls look set to continue. As they do so then the level of deposits and the ELA support provided by the central banks will get ever nearer as the system gets ever more unbalanced.

Comment

It is a grim feature of Greek economic life that seven years after the credit crunch hit the world that Greece is having its own domestic credit crunch via deposit flight. This does not have one of the features of deposit flight which is a collapsing currency because Greece shares its with a much larger group. But the price being paid for this is that its central bank is rather a fumbling lender of last resort and this is a case where the aphorism “time is money” certainly applies.

Having a normal central bank is not a cure-all as for example the collapse of Northern Rock in 2007 showed. But after a few misfires Mervyn King and the Bank of England stepped in decisively and the panic period was mercifully short. What the Greek deposit flight crisis lacks is anything like this from ECB President Mario Draghi.

whatever it takes…

Meanwhile quite a squeeze is being applied to the Greek economy by all of this as the soil required for deposit flight gets tilled over once again. Or as Jay-Z via the musical Annie put it.

It’s the hard knock life…
It’s the hard knock life..

It’s the hard-knock life for us
It’s the hard-knock life for us

Greece is the word one more time as the economics version of a car crash continues

Today sees a meeting between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras as the Greek Prime Minister visits Germany. As he does so we find ourselves singing along to the rock band Muse.

Our time is running out
Our time is running out
You can’t push it underground
You can’t stop it screaming out
How did it come to this?
Oh

 

There are genuine fears now that Greece will run out of money and these have been reinforced by the letter that Alexis Tsipras sent to Chancellor Merkel last week.

What did the letter say?

The crucial part involves a combination of putting pressure on the European Central Bank to provide more liquidity for Greece and in the part I emphasise a statement that Greece could run out of money. From the Financial Times.

Given that Greece has no access to money markets, and also in view of the ‘spikes’ in our debt repayment obligations during the Spring and Summer of 2015 (primarily to the IMF), it ought to be clear that the ECB’s special restrictions [see (a) above] when combined with the disbursement delays [see (b) above] would make it impossible for any government to service its debt obligations.

 

 

That is a threat of default in anybody’s language and is reinforced by the fact that Greece’s creditors are now in essence official ones so it is a threat to Euro area taxpayers and at the limit to world taxpayers via the International Monetary Fund. As Euro area minister set up their “rescue” vehicles on an off-balance sheet basis any sizeable losses would pose a problem as they bring them back into the national accounts. Ouch! For example earlier this month Handelsblatt raised the issue with the head of the main two rescue vehicles.

Handelsblatt: Mr. Regling, the euro rescue fund EFSF has lent around €142 billion to Greece and is thus by far Greece’s largest creditor. Are there realistic chances that this money will ever be repaid?
Regling: Greece has to repay that loan in full. That is our expectation, nothing has changed in that regard

 

As you can see he has a mantra to chant. What was the saying that if you owe one Euro to a bank it owns you but if you owe 142 billion you own it? Even back then Klaus Regling was irritated I wonder what he is now?

That is one of several recent statement that have irritated me.

 

The Klaus Regling View

The view of the Euro area establishment was given by Klaus Regling in that interview too.

Economists who claim this have not done their homework. It is true: the Greek debt level of around 175% of GDP is very high. But this does not burden economic development because the debt service is very low. The EFSF has suspended interest payments for Greece for 10 years and the average maturity of our loans is around 32 years.

 

So as long as the interest-payments are low you can borrow as much as you like! There is no allowance here for the size of the capital burden or feeling out of control of events.

A Confession

Klaus let the cat out of the bag when he stated where the bailout money had gone.

Handelsblatt: The Eurozone and the International Monetary Fund have already granted loans to Greece in the volume of around € 240 billion. Where did all this money go?
Regling: With financial volumes of this magnitude at stake this is a justified question and the answer is no secret: around three-quarters of all the loans for Greece have been used to serve the country’s debt to private and public creditors.

 

So much for helping the Greek people as claimed! The reality as I have often pointed out on here is that it was a rescue operation for Greek, German and French banks in the main. The ordinary Greek was sold very short and not told the truth.

What about the economy?

The other side of such arrangements is the economy. A large debt burden can indeed be affordable if an individual,company or nation manages a fast rate of income growth. Unfortunately the austerity medicine prescribed for Greece made the illness worse and not better. As the boom ended in the latter part of 2007 then Greek Gross Domestic Product rose to 65.2 billion Euros per quarter (2010 prices) and by the last quarter of 2014 it had fallen to 46.6 billion. Even worse the official chorus proclaiming that a “Grecovery” was in place had to face this reality.

Available seasonally adjusted data indicate that in the 4th quarter of 2014 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% compared with the 3rd quarter of 2014.

 

Also the rate of growth compared to a year before slowed as opposed to the surge you might expect after declines equivalent in economic terms to something of a nuclear winter.

This is the other side of the debt burden coin as Greece faced not only a lack of economic growth – remember the original bailout forecasts involved economic growth returning in 2012-  but a contraction which peaked at 10% per annum. Thus the national debt to GDP burden which was supposed to be reduced from 170% to 120% by the 2012 private-sector default or PSI is now at 175%.

The Greek Banks

These are part of the rescue mechanism proposed by Alexis Tsipras and the Greek government as it wants them to be allowed to buy Greek sovereign debt. Greece is still issuing short-dated debt called Treasury Bills. Frankly nobody else shows any particular inclination too! The catch is that permission is needed and this looks like debt monetisation mostly because it is on a road to it.

However the Greek banks in spite of all the money that has been poured into them are in a bad way as deposits flee. In December and January some 16 billion Euros or just under 10% left the Greek banking system taking it back to levels last seen in 2005. Bloomberg estimates that another 1.6 billion Euros left the system last week.

In response the European Central Bank has allowed the Greek central bank to stabilise the system via Emergency Liquidity Assistance or ELA. But it is doing so on a short leash as it only allowed an extra 400 million Euros last week and in itself it hardly inspires confidence that the Greek banking sector now requires some 69.8 billion Euros of ELA.

Credit Crunch Alert

Greece faces two types of potential credit crunch right now. The first is being faced by its banks as they see deposits flee the country. This in my view was exacerbated by an extraordinarily stupid statement by Dutch Finance Minister Jerome Dijsselbloem made six days ago.

capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.

 

Bank depositors in Greece have clearly constructed one or two scenarios of their own and decided to flee! You would have thought a muzzle would have been put on “Dieselboom” after he regularly put his foot in his mouth over Cyprus, but apparently not.

The second capital crunch is for the Greek government which has to pay out around 2 billion Euros before the end of April and around 5.7 billion Euros according to Bloomberg by the end of the second quarter of 2015.

Comment

The irony of all this is that with monetary policy so loose and the impact of much lower oil and commodity prices feeding into the system Greece should be finally seeing springlike economic conditions. Yet in something of an anti-triumph the latest business survey reported this about Greek manufacturing.

February saw a further contraction in Greece’s manufacturing sector, with the rate of decline in production the fastest seen since October 2013.

 

Another very important metric is again showing signs of struggling and it gets even harder to express how grim this must be.

The unemployment rate was 26.1% compared
with 25.5% in the previous quarter, and 27.8% in the corresponding quarter of 2013

 

Employment fell compared to the previous quarter as well. Added to this has been yet more grim data from Greece today.

The Turnover Index in Industry (both domestic and non-domestic market) in January 2015 compared with January 2014 recorded a decline of 16.0%.

Thus we see a situation where the economy is struggling in spite of favourable developments and both the banking and government sectors face a credit crunch. To the Greeks it must seem that.

You will suck the life out of me

 

Of course I suggest that they take a route which involves default and devaluation which the actual position sadly looks more like this.

I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted

 

Want to help?

The Bank of Greece does have an account for this.

Pursuant to Bank of Greece Governor’s Act 271/4.3.2010, an account entitled “SOLIDARITY ACCOUNT FOR REPAYMENT OF PUBLIC DEBT” (No. 24/26132462) has been opened at the Bank’s Head Office, Public Entities Accounts Section, for voluntary deposits, to be used exclusively for the repayment of Greece’s public debt.

 

The details of the solidarity account are as follows:
IBAN: GR 04 010 0024 0000000026132462
SWIFT/BIC: BNGRGRAA.