By MC, Globetrotting in Europe:
On Friday, there came the announcement that two Greek banks filed requests with the Bank of Greece for hard cash through the Emergency Liquidity Assistance (ELA) system.
The ECB and associated national banks have so far been cryptic about what ELA truly is. But from what I have been able to piece together, it’s an emergency scheme aimed at obtaining immediate cash reserves. Not credit, but cash.
Banks can obtain credit at ridiculously low interest rates (0.05%) straight from the ECB by presenting government bonds as collateral, while the ELA system allows for a much wider range of collaterals but carries a “punitive” 1.55% interest rate. Apart from collaterals, the difference seems to be that ELA allows the bank to access funds far faster than by using conventional channels.
On Saturday, it was revealed that all four Greek “systemic” banks have filed ELA requests. “Systemic” is another word for “the country’s largest banks.”
What’s happening is easy to imagine: faced with the uncertainty of an election that’s been drummed up to as the most formidable threat to Europe since the Red Army stood ready to pour through the Fulda Gap at a moment’s notice, Greek citizens are making a run to the banks.
Why are they so scared?
Personally, I don’t believe that many people buy into a return to the drachma. What most fear, and rightly so, are capital controls.
Greeks remember very well what happened in Cyprus in 2013, when local banks were given a big thumbs-up from Europe to help themselves to their depositors’ accounts. Cyprus and Greece are very closely tied, and many Greeks consider the island a “sister-nation.”
What little trust remained in banks in Greece died that day. People have been nervously looking for signs something similar may happen again in their home country. And they resolved to act at the first sign of danger: banks cannot confiscate money you have under your mattress. Cash can be hidden away.
There are also rumors afoot that negotiations between the Troika and the new Greek government that will emerge from the elections may stretch for six months or more. Six months is an awfully long time, and many fear that capital controls may come into being to block capital flight from Greece during that long time.
Finally, there’s a lesson from Italy: to meet goals set by the Schengen Treaty, that country’s government had absolutely no qualms raiding deposits to get a one-time fiscal shot in the arm. It can happen again: populist leaders all over Europe have been making vague but threatening references at similar moves for over a year now.
In short the Greek people are scared about the future and are scrambling for the exit door.
It didn’t help one tiny bit that powerful EU officials have been acting like mafia dons, threatening exactly what people have been fearing all along.
I mean no disrespect to the Greek people, who have been suffering, and will continue suffering whatever the outcome, from the political delusion of maintaining the illusion of an eternal European Union even in face of disaster – but I personally believe they have been recruited as unwilling actors in a theatrical piece.
As Wolf Richter reported, the ECB is a prisoner of financial markets. By pledging to do “whatever it takes,” Mario Draghi effectively handed the keys to the monetary arsenal of mass destruction over to speculators and politicians. Both expect nothing less than full cooperation from the ECB in propping up financial bubbles, especially the most egregious of them all: sovereign debt. And they expect nothing less than “whatever it takes.”
The ECB has been attempting to walk the tightrope: on one side, they are appeasing German, Dutch, and other North European voters by promising not to include Greek bonds in the long-announced QE scheme. On the other, the panic over the Swiss National Bank being the first casualty in the currency war is forcing their hand to deliver on the promise of “whatever it takes.”
How will things go down? As usual, I make no claims to future knowledge, but I always keep Hemingway’s quote from The Sun Also Rises in mind: “How did you go bankrupt? Two ways. Gradually, then suddenly.” By MC.
Now even a French Megabank admits it: the ECB is “a prisoner of financial markets’ expectations.” Read… Without QE, “Eurozone Financial Markets Would Collapse”
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…I guess the Greek have invented a new form of Olympic Sport… the bank run..
Cypress moments at Athen around the corner?
Max 100 euro daily withdrawal? 7 to 10% haircut overnight on deposit to be handed it over to EU overlords for EU bank bailout? Cypress is much smaller island and lot of “questionable” Russian money took the hit but Greeks may not take it so well… Scary thing is that TBTF banks in collusion with governments can pull this outright theft…
I think this article is overstating it a bit i.e. had the Greeks really lost all trust when the whole Cyprus debacle happened, they would have withdrawn everything in the next couple of days after the event, instead they waited till now to do so. I guess what I am trying to say is that the connection to Cyprus is thin.
So the ECB has at long last found itself backed into a corner, having to make a decision. No matter what they decide, there will be fallout, and that fallout could take down the EU.
Refuse Greece another bailout? Greece has no reason to stay in the EU.
Give Greece a bailout? Merkel will be under unbearable pressure at home and she will be shown to be losing a political battle with Greece, very embarrassing.
QE? It better be the grand variety, anything less will disappoint after big mouth Draghi’s promises.
Somebody high up must be seeing the writing on the wall by now.
At the moment I wouldn’t worry too much about Germany if I were Draghi. So far their political class has been very amenable and contented itself with token measures to save face at home.
The peculiarities of the present German political system ensure there are no risks a Nigel Farage, Geert Wilders or Marine Le Pen can emerge anytime soon and Angela Merkel and her allies can present themselves as the lesser of two evils. Things are bound to change, and when the time will come they’ll move very quickly, as it always happens in Germany, but not right now.
To this it must be added German exporters love the ECB and the EU in their present format. Removal of trade and, more critical, currency barriers in Europe has been a huge boon for them. And the euro is far more conductive to exports than the old “too strong” mark.
Let’s now focus on Draghi’s much ballyhooed QE. It’s rumored in the present format national central banks will be authorized to buy up to 20% of their own country’s public debt. For countries like France and Italy, the numbers involved are simply staggering. If these bonds were to be purchased with newly minted money, it could well lead to the much desired flare-up in inflation everybody (but me) seems to be eagerly awaiting.
And here’s where the plan will fall apart. We all know German taxpayers and consumers hate inflation. But since 2002 French, Italian, Spanish, Portuguese etc taxpayers and consumers have been using a currency that, although not as stable as the old mark, is a far cry from the jokes their old currencies were. Just to give you an example when the euro came into being it, the official exchange rate was 1€ for 1936 Italian lira and 1€ for 1.95 marks.
If all that mass of money “breaks the dam” of the banking system it will reveal both the ECB and the populists so popular right now for the snake oil peddlers they truly are.
The ECB’s stated mission is “to keep prices stable”, a clause to keep German taxpayers from rioting in the streets. Yes, they failed, but price increases have been very steady so far (with a welcome vacation in 2008-2009) and have been mitigated by the flood of cheap consumers goods originating from China. How will prices remain “stable” if a mass of euro worth 25% of the Italian GDP is unleashed? You cannot keep those euro inside Italian borders with a common currency. Add to that France, Spain, Portugal, Belgium etc and you get the picture.
Populists have made a return to old national currencies one of their battle cries, espeically in France and Italy. Apart from the confused monetary theories they display, one of their main rationales is national currencies would allow for a “painless” monetization of debt. If QE is implemented in its leaked format, it will be anything but painless. They will be unmasked as the charlatans they truly are.
There are no free lunches anywhere.
“If you can read the handwriting on the wall, you’re in the toilet.”
-Redd Foxx
If you can read the handwriting on your left forearm, right thigh and on the back of your neck with aid of a mirror, you could be mistakened for a portable toilet.
Given Syriza wants to stay in the Euro and EU should they win the election I’ll be all out of sympathy for the Greeks, they’re turkeys voting for Christmas.