The Corner

National Security & Defense

Greece Slides

As usual it’s worth watching what’s happening with the banks.

Reuters (my emphasis added):

Bank withdrawals accelerated and government revenue slumped as Greece defied its international creditors on Thursday, escalating a debt crisis that may reach a climax at a European Union summit next week. Savers pulled out some 2 billion euros between Monday and Wednesday, senior banking sources told Reuters, double the amount that the European Central Bank granted Greek banks in extra emergency liquidity assistance (ELA) for the whole week.

The ELA is, as its name would suggest, the emergency life support system for Greece’s embattled banks. A full-scale bank run could bring what is now clearly an accelerating crisis to a head very quickly indeed.

Reuters:

The IMF meanwhile dashed any hope that Greece could avert default if it fails to repay a 1.6 billion euro ($1.8 billion) loan by the end of June, piling pressure on Prime Minister Alexis Tsipras, who showed no sign of yielding to the lenders. If deposit flight continues to outpace ELA, it could force Greece to impose capital controls, as Cyprus did in 2013, to ration cash withdrawals and stop money fleeing the country.

The 2 billion euros taken out in just three days represents about 1.5 percent of total household and corporate deposits of 133.6 billion euros held by Greek banks as of end-April. Before this week, withdrawals had been running at 200-300 million euros a day.

Another Reuters report puts Greek pleas for debt relief in helpful context (again, my emphasis added):

Greece has already received debt relief from its euro zone creditors equal to half of its 2013 GDP in net present value terms, the euro zone bailout fund said in its annual report, noting Greek public debt was now high but sustainable. Greece has made debt relief a key demand in its negotiations with international creditors on what reforms it must implement to secure further funding. Without new loans it will default and, possibly, be forced to exit the euro currency.

But euro zone governments have argued Greece’s debt is sustainable, provided the country implements agreed reforms. The report from the European Stability Mechanism (ESM) [the euro zone’s ‘permanent’ financing vehicle] said that after various modifications made to the original terms of bailout loans over the last years, Athens had minimal payment obligations until 2023.

….The bailout fund said that Athens received debt relief equal to 49 percent of the country’s 2013 GDP in net present value (NPV) terms. The NPV approach discounts the difference between the future cash flows of the loans benefiting from lower financing costs and debt relief measures and the cash flows of the same loans had they not benefited from the relief measures.

Greece is borrowing money from the bailout fund at 1.35 percent — a lower rate than many euro zone countries. This is also almost three times cheaper than borrowing from the International Monetary Fund, which charges 3.6 percent. Before the crisis, Greece was able to borrow on the market at around 5 percent, the ESM said. The average weighted maturity of the euro zone loans to Greece is 32.5 years and no interest or principal has to be paid back before 2023.

Back in January, I linked to a piece in the Financial Times looking at the sustainability of a debt burden that now stands at around 175 percent of GDP.

Here’s an extract:

“A ratio of 170 per cent does not mean anything,” said Lorenzo Bini Smaghi, a former executive board member of the European Central Bank. “The debt has a very low interest rate and a maturity of over 15 years. Its impact on the economy is much lower than in Portugal or Italy,” he added.

To put it (over) simply, the argument between Greece and its creditors falls now into two areas, (1) yet more debt forgiveness (for which the case is, as demonstrated above, not very convincing) and (2) the continued restructuring of the Greek economy, where there could easily be some wriggle-room if the creditors believed that Greece’s far-left government was serious about cutting a swollen and sclerotic state down to size. For some curious reason they do not.

What is clear is the wheels are coming off. Not only is there increasing deposit flight, but there is also this:

Financial Times:

Greek government revenues in May were €900m, or 24 per cent, short of the monthly target, according to preliminary budget figures. It had met projections for the previous three months.  But the country still ran a primary budget surplus — before making payments on the public debt — amounting to €1.5bn for the first five months, after it slashed payments to suppliers and outlays for public investment.

“There appears to be a complete freeze on domestic payments apart from wages and pensions as the government rounds up cash to pay international creditors,” a senior Athens banker said. “This is starting to have a knock-on effect on revenue collection.”

Greece’s central bank has warned about an “uncontrollable crisis” if no deal is struck soon.

The least bad option for Greece continues, in my view (and in the absence of a broader split of the euro into northern and southern units), to be a Greek departure from the euro zone, accompanied by a generous rescue package. Then the country can, so to speak, ‘reprice’ itself and as such start to attract the investment it needs, although who will invest in a Greece now run by Syriza remains a very awkward question.

There are, however, still plenty of reasons to think that Greece will stick with the currency that has brought it so low. One is that a large majority of Greeks (74 percent, according to a recent poll) want to do so, not least because they do not want to be cut off from the path away from the old Greece that they believe the single currency represents. Another is that those negotiating with Greece are legitimately worried by the unknown unknowns that Grexit might bring in its wake, not to speak of the damage that would be done to the credibility of a currency—the euro— that is allegedly ‘irreversible’.

I still think that some sort of deal will be done, but the chances of Grexit and, even more so, a Cypriot solution which ring-fences Greece while formally preserving its membership of the currency union, have risen very sharply indeed. In the meantime, why anyone keeps any money in Greek banks is beyond me.

Meanwhile, subtle as ever, Greek PM Tsipras is traveling to Moscow on Friday. 

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