Here is where the real danger lies

Those bleeding Greek banks..

Yes, there is some good news:

  • France banks have apparently agreed to extending Greek bond maturities and German banks might be on board
  • The Chinese have publicly said they would keep buying euro dominated bonds
  • The Greek government won a vote of confidence last week and might well win the vote on the austerity package (jury still out, anything’s possible)

However, the drip, drip, drip of capital flight could easily undo all progress, and then some..

Moody’s: Greek Banks Have Lost 8% of Deposits
Greek banks have lost about 8 percent of their private-sector deposits so far this year as customers worried about Greece’s potential debt default transferred funds abroad or bought gold, Moody’s said Monday.

The ratings agency said in a report that about half of the decline in deposits was also because of the cash-burn effect of Greece’s recession, which caused individuals and companies to withdraw their savings to compensate for their lower income.

But “confidence-sensitive depositors concerned about local banks’ financial health have also been transferring funds abroad and converting their deposits into gold coins, while others have been placing their cash into bank safety-boxes,” Moody’s said, citing recent media reports.

Moody’s warned that Greek banks would face severe cash shortages if outflows increase to 35 percent of deposits. It called the current level of outflows “a key credit negative” for the banks.

Outflows accelerated in May and June because of political tensions and uncertainties regarding the commitment of European authorities to keep funding Greece, Moody’s said.

“The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece’s capability for timely repayment of its debt obligations,” Moody’s said in the report.

The euro initially fell about 0.1 percent against the dollar after Moody’s comments. It erased losses, trading up 0.2 percent at $1.4220, as investors await a key vote this week by the Greek parliament on austerity measures.

The ECB replenishes the capital, but they need collateral to do so, the obvious collateral are… Greek public bonds.

If these are marked down, this whole operation comes to a grinding halt and the capital bleed from Greek banks cannot be stopped anymore. In case you wondered why the ECB is so mordicus against any Greek debt restructuring, now you know..