Greece’s slow motion euro exit

Happening right in front of us..

Jogging for the Exit

FT Alphaville has a good writeup of what’s happening, and — implicitly — how Greek euro exit may be approaching.

What’s happening now is a “bank jog” — Greeks are pulling euro deposits out of banks fairly rapidly, but not quite fast enough to be called a bank run.

But where are the euros coming from? Basically, banks are borrowing them from the Greek central bank, which in turn must borrow them from the European Central Bank. The question then becomes how far the ECB is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default?

Yet if the ECB says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else.

And if that happens, surely depositors in other European countries will start their own bank jogs …

First, a detail from the FT’s take on Greece’s political turmoil:

Several Athens bankers voiced concern on Tuesday over a sustained outflow of deposits of more than 5bn since May 6, reflecting increased political uncertainty.

That would work out at an average of €700m per business day, up to May 15.

Second… via the WSJ, Greece’s president has released further minutes of meetings to scrabble together a coalition government. That’s all academic now. But the details that President Papoulias revealed about deposit outflows aren’t:

The situation is difficult for banks. Up to the time I got them at 4pm, withdrawals exceeded €600m, arriving at €700m.

The President also noted an increase in buy orders for German bonds. In these circumstances that means German euros. Those were estimated at another €100m, according to our Google Translate hack of the transcript:

There are not added, and all those who took orders banks to convert German government bonds and other such things. And estimate that they will be totaling approximately 800 million euros.

FOTIS KOUVELIS (President of the Democratic Left): All together?

Karolos Papoulias (President of the Republic): Yes, all together.

Papoulias also said something along the lines that Greek central bank chief George Provopoulos told him this was not a bank run, but a “great fear” that could turn into a panic.


OK — not really a surprise to see deposit withdrawals and a flight from Greek euros now, with a euro exit in the air, you might think. But in a way it is.

The amazing thing about the Greek banking system since 2009 is not just the 25 to 30 per cent of deposits that have left, but the 70-75 per cent which have stayed. They have stayed through two years of Greece transparently getting closer to leaving the euro and turning these deposits into drachma. We’re being serious. It’s a real challenge to prospect theory. Up to €170bn remained in banks at the end of March.

Although deposits clearly do respond to politics — the Greek President made that fairly clear this week — they have tracked the rate of Greece’s economic decline since 2009 pretty closely too. Maybe that says something about general pressure on Greek household wealth, as a driver of deposit flows. In any case, depositor flight has been what Gabriel Sterne, an economist at Exotix, has previously called a ‘bank jog’. Something to think about. What it becomes now with a month to go before fresh elections is another question.

But our main point is really about the emergency liquidity assistance from the Greek central bank which replaces lost deposit funding. ELA came to about €60bn at the last count though it is clandestine by nature.

In light of all the above, we should go back to what the European Central Bank’s Luc Coene said earlier this week to the FT:

No, we don’t have a choice. We do not provide ELA to insolvent banks.

Coene is simply repeating longstanding ECB policy. But in the case of Greece, the ECB board approves (so can not officially approve) the national central bank’s use of ELA on a short-term basis.

The strains that could be placed on this system were captured pretty well by JPMorgan’s Flows & Liquidity analysts in a note published last week:

Greek banks have run out of ECB eligible collateral already and can only access Bank of Greece’s ELA, but even with ELA, the collateral, typically loans, is not unlimited. They have already borrowed €60bn via ELA which, assuming 50% haircut corresponds to around €120bn of loan collateral. Outstanding loans are €250bn, so Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA. This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March. The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA. The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2 and force it to eventually issue its own money.

There’s surely not much question that the Greek government would like some of its banks to survive after it leaves the eurozone.

The question is whether, and why, the ECB would pull the plug if the bank jog does accelerate. We sort of know why from what Coene said. But JPMorgan mention the Greek central bank’s liabilities to the other eurozone central banks within Target2.

Currently the liability is around €100bn. This is a pretty big hole to punch in the balance sheet and to divide among countries according to the ECB’s capital key. We suppose allowing a steep ELA increase would punch an even bigger hole, but this is already a huge price for driving Greece out of the euro.

But increasingly it seems it would be the driver.

Update — Similar points made by the BBC’s Paul Mason. Hopefully — the ECB gets it.

Additional reporting by Kate Mackenzie.

Related links:
Greek President Told Banks Anxious as Deposits Pulled – Bloomberg
Greek bank run splits analysts – FT
Greek funny money – FT Alphaville