The ties we don’t see but can’t ignore

President Karolos Papoulias was correct to stress to party leaders the unusually large amount of savings being withdrawn from Greek banks over the past few days but this also caused some unnecessary arm-flapping, a practice which always obscures people’s view of what is important.

Papoulias told party leaders on Monday that 700 million euros had been withdrawn from Greek banks on Monday. Banking sources told the Financial Times that about 5 billion euros had been withdrawn since the end of April. Savings disappearing from Greek banks is nothing new. Deposits have fallen from about 240 billion euros in 2009 to some 170 billion now. However, the rate at which money is being withdrawn at the moment is a cause for concern.

The crisis has seen about 3 billion euros per month being withdrawn from banks by Greeks — both those who are drawing on their savings to pay bills and cover other costs as well as those sending money abroad for safety. This peaked in January, when about 5 billion was withdrawn, largely due to Greeks having several tax bills to pay at the time. So, a reported 5 billion euros being taken out in just two weeks certainly should command attention.

It should do so because the Greek banking system is the country’s Achilles heel at the moment and while the focus is on whether Greece will get its next loan installment from the European Union and the International Monetary Fund so it can pay wages and pensions, the real danger could lurk elsewhere.

Greek banks are precariously balanced between collapse and at least temporary stability as they wait for the 48-billion-euro recapitalization program to be carried out. The European Central Bank said on Wednesday that this process would begin “soon” after the settling of a dispute between the ECB and the European Financial Stability Facility (EFSF) over exactly how it would be carried out.

While the recapitalization underlines just how reliant the Greek banking system is on outside assistance, the truth is that the banks have been hooked up to the life support system for some time. Understanding this process might drive home just what a precarious position Greece finds itself in.

To make up for the loss of deposits over the last two years, the ECB has allowed Greek banks, shut out from intermarket borrowing and lacking collateral that the central bank would accept, to be financed through emergency liquidity assistance (ELA). This means that the banks are able to borrow from the Bank of Greece, rather than the ECB, by putting up collateral that is theoretically more risky than bonds, such as small business loans or mortgages. It is thought that Greek banks have borrowed about 60 billion euros this way. But the supply of money is finite. Parliament has set the limit for the ELA scheme at 90 billion euros and Greek banks do not have limitless collateral.

Furthermore, there is the possibility that the ELA tap could be turned off if central bankers in Frankfurt become concerned about Greek banks becoming insolvent. In order to access ELA, currently the banks’ only source of funding, albeit a dwindling on, the ECB board needs to give its approval. But ELA funding could be halted with a two-thirds majority decision. This would cut off Greek banks from liquidity and Greece would be forced to begin printing its own money. Since it can’t print euros, the only option would be to return to the drachma.

This explains how finely balanced the situation is and why a bank run could trigger Greece’s exit from the eurozone rather than a squabble about austerity measures and loan tranches. It is extremely worrying, therefore, when some politicians in Greece keep insisting that there is no way for the country to be forced from the euro area as such a process is not included in any treaty. A halt to liquidity would end Greece’s euro membership, treaty or no treaty.

However, there is also reason to believe that the weakness of the Greek banking sector may also be a reason to keep Greece in the euro.

Deposits within the eurozone are transferred through a central payment system, known as Target2. When a depositor in Greece moves their funds to a bank in another eurozone country, the payment is processed through Target2. This creates a claim between the Bank of Greece and the rest of the Eurosystem. If there was panic in Greece about the country leaving the euro, depositors might move large amounts of funds to safer countries. These transfers would be funded by the Bank of Greece through ELA. A Greek collapse would, therefore, have a serious effect on the Eurosystem and potentially banks in other countries.

The Bank of Greece’s liabilities to other eurozone central banks are currently thought to total about 100 billion euros. “This is a pretty big hole to punch in the balance sheet and to divide among countries according to the ECB’s capital key,” wrote the Financial Times’ Joseph Cotterill in the Alphaville blog on Wednesday. “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.”

However, the bigger issue is that uncertainty about Greece’s future in the euro could spread to Spain and Italy, which have huge liabilities. “What policymakers and market players are worried about right now is if foreign investors see a Greek deposit crisis as a signal to rush for the exits in Italy and Spain,” wrote the BBC’s Paul Mason on Wednesday.

It emphasizes what has been increasingly evident as the Greek crisis has deepened: Despite seeming to move further apart over the last couple of years, Greece and the eurozone are bound to each other in ways that are not immediately visible. Because we don’t see those bonds, doesn’t mean that they can’t be broken. Because we don’t want to notice them, doesn’t mean that the pain will be any less if the ties are cut.

Nick Malkoutzis

7 responses to “The ties we don’t see but can’t ignore

  1. I was baffled by Papoulias’ comment. It works out to around €80/person. Most people get paid around the 12th-13th of the month. Monday was the 14th. Everyone *I* know here in Greece (granted I am not a member of the rich elite) is living month to month, so they wait til their paycheck is deposited, and then remove it to pay bills and buy food and gas. I am sick of hearing about the deposits leaving Greek banks. ALL the money in our bank account is salary money – money that is only in the bank for a day anyway, because we, like pretty much everyone we know, need it to pay bills. Those are not “deposits leaving”. That is money that Greek law now requires to be deposited into a Greek bank account rather than doled out in cash, but is only going from the employer to the employee’s pocket, as soon as he has a chance to get to the bank. Correct me if I’m wrong about this – maybe they don’t count deposits that sit in the bank for less than a month in this number? I would hope they don’t but I’m not privy to that info.

    Anyone who wanted to send money abroad has done so. The money in most Greek bank accounts is not Greek banks’ money – it’s salary money, and it was only the banks’ money for a few days anyway. Such a stupid system. Thanks for not discounting this completely like practically every other article written on the subject so far.

    As for the rest of the article – very thought-provoking, thank you. I have long taken it for granted that a Euro exit was inevitable, but it is nice to see some of the finer points explained.

    • Heidi, let me try to clarify. The issue of „deposit withdrawals“ is not automatically the same as your using the money in your bank account to pay your bills. Deposit withdrawals means money leaving bank accounts (typically in cash or as transfers abroad) and for good.

      Suppose you withdraw 10 EUR from your bank account in the morning and spend that cash shopping at the laikí. At that point, the banking system has lost 10 EUR in deposits. However, if the shopkeeper, at the end of the day, deposits all his sales receipts (including your 10 EUR) in his bank account, the banking system has recovered “your” 10 EUR which it lost in the morning. They are no longer in “your” account but they are in “his” account.

      If you look at your monthly expenses, you will find that a rather large portion thereof has no choice but ending up again in a bank account (taxes, official bills, etc. etc.). And of those which you pay in cash (like your expenses at the laikí), again a portion will end up in someone else’s bank account. Obviously, the more Greece becomes a cash economy, the more difficult it becomes to differentiate between “deposit withdrawals” and withdrawals to pay bills.

      If, however, you withdraw 10 EUR from your bank account and put them in your mattress, then you have withdrawn 10 EUR from the banking system for good. That is definitely “deposit withdrawals”. Also, if you transfer 10 EUR out of your Greek bank account to your bank account in the US, that is “deposit withdrawals” as well (because they leave the Greek banking system).

      So just think of deposit withdrawals as that money which leaves the banking system in cash and for good. Any clearer now?

      • Yes, that is clearer. Thanks, Klaus. I guess I just assume that most of us “human beings” (rather than the electric company let’s say) are RECEIVING less money over all – my husband for example, his salary is about 50% less than it was a year ago. So of course the amount of money that we take out is going to a be a higher proportion of that salary and the amount we put back into other people’s accounts by spending is going to be much lower proportion compared to a year ago. Where does our money go? When we take out the first 2 weeks’ salary, all of that money goes to our landlord, who is retired. His pension was slashed and he owes more taxes, so he is not going to be putting all that money in the bank. He’s going to be spending our rent on food. And the person who receives that money is going to be spending it on HIS rent/taxes/etc and so on. My point is that we all have so much LESS money right now that we are using all of it. My husband’s salary goes into the bank by law, but it doesn’t make its way back there in the same way that it used to. I don’t know if I’m making sense. But thanks for explaining the concept to me!!

  2. I am surprised how common it has become to talk about “Greece leaving the EZ” or “Greece being kicked out of the EZ” or even “Germany leaving the EZ”.

    As far as I know, it is legally impossible for any country to leave the EZ, much less being kicked out of it. The procedure is that a country would first have to leave (or be kicked out of) the EU and subsequently it would be out of the EZ. I would imagine that a country could probably leave the EU anytime it wants to but to kick out a country of the EU would definitely require a process, a process which will definitely take longer than 24 hours.

    Suppose the new Greek government repudiates all its debt and Greece is cut off from all new funding (including funding from the ECB). That would not mean that Greece would have to leave the EZ (among others because it couldn’t; see above). It just would mean that Greece would be a bankrupt country in the EU and probably could not pay salaries or pensions. It is not illegal within the EU to go bankrupt.

    To not be able to pay salaries or pensions is, of course, a nightmare for any government but it is not a reason to lose one’s nerves right away. First, a government can delay a lot of other payments before it has to delay the payment of salaries or pensions. Also, the Greek government could pay salaries or pensions with post-dated checks and thereby create something like a secondary market for Euros. And so forth. There are no limits to creativity when one is out of cash.

    The most important aspect, in my opinion, is that the EU could probably not get away with just sitting-by and watching how a member country can’t pay salaries or pensions. If one were to bet that the EU would blink first, I would consider that as a good bet.

    None of that, of course, is a solution for the longer term. The solution for the longer term, in my opinion, can only be something which incentivates the economy to create new jobs; new jobs whose holders can afford a decent living while still paying tolerable income taxes; where the employers can pay tolerable corporate taxes and the owners can pay tolerable taxes on dividends. Some believe that austerity, austerity and austerity will achieve this. I would suggest that reforms, reforms and reforms will achieve that (and with reforms, austerity makes sense).

  3. Nick:

    The Greek banks need to be recapitalized directly from the ECB without interference from the Greek political system. The current situation is a result of a Venizelos decision to defer important decision for after the March 6th elections which now we know produced nothing.

    We spoke about these issues before when you complained that Greek banks were responsible for lack of liquidity and investment in the marketplace.

    Until and unless the Eurozone decides on the Tier 1 limits which form the minimum basis for safe lending, Greek banks can’t do anything but watch an impotent political class use them for populist propaganda.

  4. Sorry…I meant to say:

    …important decisions for after the May 6th elections…

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