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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