Greek banks, the euro and the ECB

 

Talk of a run on Greek deposits, and some banks being cut off from European Central Bank (ECB) support, have added a fresh twist to scary talk about Greece and the euro.

The details are complicated, and not quite as frightening as they first appear. But the big picture is scary indeed, not least for the ECB.

The numbers on how much has recently been taken out of Greek banks by depositors have been much disputed - not surprisingly, when the official figures will not be published for weeks.

Depending on who you talk to, anything from €700m ($892m; £560m) to €1.2bn was taken out of banks in the days after the election, out of total deposits of around €160bn. That total, in turn, is about a third lower than it was at the end of 2009.

At the same time, the ECB has apparently now said that it won't directly lend to some Greek banks that it judges to be technically "insolvent". These are banks that have holes in their balance sheets, because, thanks to the restructuring of Greek sovereign debt, they can't now expect to get back all of the money that they lent to the government.

That sounds bad, but the banks that have lost access to direct ECB funding can almost certainly still get money from the Greek central bank, which, of course, is ultimately, getting its cash from the ECB (though unlike the more direct form of ECB liquidity support, all the risk implicit in this so-called ELA lending is, formally at least, borne by the Greeks alone).

As I say, both stories are complicated, and somewhat disputed, but, taken together, they do help to underscore two important realities.

The first is that the sheer uncertainty hanging over Greece and the lack of a proper government is greatly increasing the room for costly financial accidents.

The banks that the ECB has cut off, at least from direct ECB assistance, are due to be recapitalised any day now as part of the latest bailout. There is €48bn in the EU-IMF programme, earmarked for precisely this purpose, half of which has already been transferred to a special Greek fund. But in the current fraught situation, the Greeks can't even sort out how to get the capital into the banks, let alone when.

The second and most important reality is that the ECB is once again exactly where it doesn't want to be: right at the centre of events.

In the eyes of the markets (and most politicians), the central bank has the power to make or break the Euro. What the institution does not have is any desire to do this, or formal legal responsibility (I have explored some of the difficult issues for the ECB here).

The fall in Greek deposits, which are down by nearly a third since the end of 2009, is one reason why the Greek banks are now so dependent on money from the ECB. The other reason, of course, is that private lenders are not willing to lend to them any more.

One in five euros that Greek banks now lend to households or companies is propped up by the ECB. If Greece left the euro, all of that would stop and the Greek banking system would simply be unable to function.

Some see the leak about the ECB withdrawing funding from those banks as a giant blunder on a day when the president of the ECB, Mario Draghi, said in support of Greece only that the ECB had a "strong preference" for It staying in the euro.

Others think it's all highly strategic: the ECB wanted to remind Greek voters and politicians that if they stumble out of the euro the Greek financial system, to all intents and purposes, will be finished. Not getting the next disbursement from the IMF and the EU is the least of it.

I suspect the truth is less calculated. As we have seen, this is an environment ripe for accidents and unforeseen consequences.

But it would be no surprise if the ECB were trying every trick in the book to get Greece to toe the line.

Why? Because if things continue on their current trajectory, and Greece leaves, the ECB is the only institution with even a fighting chance of seeing off a panic in countries like Portugal, and "saving" the euro.

Mario Draghi doesn't want to be the Euro's "saviour" because that ought to be a job for governments. But nor does he want to be the one to pull the plug.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 186.

    perhaps if Mr Cameron kept his mouth tightly shut for more than five minutes, and let those in the Eurozone get on with their business the market would start to settle down. Cameron needs to come home asap and start doing the job he is paid to do. In case he has forgotten he is presiding over a double dip recession in the UK of hi sown making. Anything else is beyond his pay scale.

  • rate this
    -1

    Comment number 185.

    #176 sjov

    ""Greek officials said Chancellor Angela Merkel had suggested Greece could hold a referendum on the euro when it votes in national elections next month." source BBC. "

    --Denied --Source ´Spiegel -Online´

    --- Drachma--- and debt in Euros is the best solution.

  • rate this
    -1

    Comment number 184.

    Well the fuse is alight and now waits the big bang. Meanwhile all of the supposed responsible adults are wandering around like forlorn cattle. It appears that most(EU politicians and constituents) are willing to let the banger go off rather than provide leadership or support to this situation. The Greeks bare the primarily responsibility but did they have integrity or robust government at outset.

  • rate this
    0

    Comment number 183.

    The ECB will allow the Greeks to make an example of themselves & thereby encourage the others, it can't set a soft precedent given that other countries may follow. The ECB is backstopped by the German economy and German voters will never allow it to be pledged against other countries debts. If Greece elects Tsipras it's all over, but the markets will probably pile in early, if they haven't already

  • rate this
    -1

    Comment number 182.

    180.Suilerua; Less we forget, the 2008 Crisis was started by the failure of the US banking system. The Euro was always a disaster set to happen mind .

 

Comments 5 of 186

 

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