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been taken out of Greek banks by depositors have been much disputed - not surprisingly, when the official figures will not be published for weeks.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

  • rate this
    -1

    Comment number 181.

    171 Arthur Daley.

    Lets put that another way

    Debt Overhang = wages/income is insufficient.

    Government cuts create more unemployment. More unemployed, economics dictate wages are driven down further. Not to mentions jobs exported.

    Last time this catch 22 was brocken by WW2.

    Treatment of Greeks will demonstrate if we have learnt anything!!!

    We have a choice reset debt, increase incomes.

  • rate this
    0

    Comment number 180.

    It's hard to believe that anyone with an IQ greater than a potted plant still has their money tied up in Euros let alone an unsecured European bank. How could anyone not have seen the current crisis coming or where it is heading? Those who insist on going down with the ship will find Davey Jones' Locker as wet and deep as they say it is.Smarter people took a life raft and sailed away long ago.

  • rate this
    +1

    Comment number 179.

    178.Suilerua ; I believe houses are cheaper than tents at the moment in the US!!

  • rate this
    -1

    Comment number 178.

    The time to have been scared was when they created the Euro.The time to have gotten out is long before it came to this.The time to have left Europe behind physically and psychologically has also long since passed.Now is the time to be retired somewhere in the US enjoying the benefits of having converted those overvalued Euros and bought an undervalued American retirement home. What, you didn't?

  • rate this
    -3

    Comment number 177.

    The almost comical scenario of the Euro Zone Crisis will be played out on a Play Station near you very soon......the World must be in total disbelief with the total incompetency of the Euro Zone leaders and the autocrats from Brussels.
    Never again must politicians impose such a 'Draconian' system on their electorate, democratic principles must be respected by ALL.

  • rate this
    -1

    Comment number 176.

    "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.
    Funny idea about democracy our Mrs Merkel....shouldn't the vote come before the political action!
    Fawlty Towers ..you have been surpassed for comical & bizarre comedy by the Politicians......

  • rate this
    +1

    Comment number 175.

    128.Anglophone
    118 Powermeerkat
    Have you cottoned onto the US sovereign debt timebomb? Thus far The Fed has simply "created" more money as resulting in the greenback being worth just 2% of what it was worth in 1971 when the gold standard was finally scrapped!






    If I were you I'd be more concerned now about shrinking value of euro.

    Particularly against 'worthless' US$.

  • rate this
    -1

    Comment number 174.

    "commissioner Olli Rehn issued a statement saying that he is responsible for financial and economic affairs and relations with the ECB.

    "We are not working on the scenario of a Greek exit" he said." (BBC)




    Which means that top EU Commi-ssars still believe that denial is merely a river in Egypt.

  • rate this
    +3

    Comment number 173.

    Happy and TP

    automation aka efficiency

    You cannot have ever increasing efficiency in production which leads to lower prices without creating new sector / technology jobs

    It is debatable that enough new jobs can be created replace the lost jobs. There is also a problem in that new tech jobs tend to be skilled and lost jobs tend to be low skilled

    Look at the agricultural sector over 100yrs etc

  • rate this
    -1

    Comment number 172.

    167.armchairstrategist

    "We are repeating the 1930s and expecting a different result"

    Unless you are predicting WW3 the problem is that it was the US that changed its economy to a self supporting agrarian economy.

    Today this would lead to a much worse result... :(

  • rate this
    +1

    Comment number 171.

    164 Happy

    China is a problem but it is not the problem. Nobody in China said UK speculate on domestic housing. It is private debt in the UK which is the problem. The same problem has happened in the US and in both countries recovery is not following the usual rebound. A US study has identified debt overhang as the problem. The banks manipulated the market and guvnt did not regulate. Simple as

  • rate this
    0

    Comment number 170.

    We constantly hear of Austerity in public sector on the news BUT what about austerity within the EU machinery budget .

    I believe the EU budget is set to rise by around 5.6% , surely this should be shrinking to help reduce the burden on Govts.

  • rate this
    -1

    Comment number 169.

    #166 more_common_sense

    "I don't see why anyone who can move their money out of Greece wouldn't do so. It seems prudent to do so until some level of financial and political stability returns."

    -- you mean before taxes ?

    --Greece´s problems were not caused by honesty -- or did you miss something ?

  • rate this
    -1

    Comment number 168.

    #139 Zorba

    The statements of Merkel and others that Greece must stay in the Euro have been detrimental to Greece -it has been taken as a signal to Greeks that no changes in Greece are necessary.

    "( have been scared by EU )", also shows no Greek willingness to freely change their ways.

    "with only one outcome." ?

    A return to Civil War--with Europe blamed, because they won´t pay ?

  • rate this
    +2

    Comment number 167.

    Terry Smith, an economist at Tullett Prebon on BBC's rolling new suggested it's hair-shirts all round. Get used to it was the message. This just isn't true. Japan, despite an earthquake, a tsunami and the financial crisis is growing at 5%. Instead, we are expected to believe you can subtract to accumulate. It's nuts.

    We are repeating the 1930s and expecting a different result.

 

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