Bloomberg (my emphasis added):
Deposit withdrawals from Greek lenders gathered pace in April as a standoff between the anti-austerity coalition and its creditors renewed doubts about the country’s future in the euro area.
Deposits by households and businesses fell to 133.7 billion euros ($147 billion) from 138.6 billion euros in March, a 3.6 percent drop, the Bank of Greece said on Friday. That brings total outflows since the start of the election campaign that catapulted the anti-bailout Syriza party to power to 31 billion euros, or 19 percent of deposits.
Private deposits slumped to their lowest level since September 2004, amid concerns that the bailout quarrel between the government and its lenders will lead to a redenomination of savings to drachmas, or a bail-in of depositors.
As the Bloomberg writer explains, Greece’s banks are on life support:
Greek lenders have lost access to capital markets as well as the European Central Bank’s regular financing operations. They rely on more than 80 billion euros of Emergency Liquidity Assistance extended by the Bank of Greece [ie from the ECB] to plug the hole from withdrawals and stay afloat — a more expensive source of funding — while they are forced to participate in liquidity-draining auctions of government treasury bills.
In an intriguing piece over at Project Syndicate, euroskeptic German economist Hans-Werner Sinn suspects that a game is under way, and that that Emergency Liquidity Assistance is central to it.
Here’s an extract:
[T]he Greek government is driving up the costs of [Grexit] for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.
Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.
Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.
Target?
Back in early 2012, I posted a bit on this topic here and here. This extract from a piece by Ekathimerini’s Nick Malkoutzis is key:
[L]ast week…the ECB gave the nod for Greek banks to be financed through emergency liquidity assistance (ELA). This means that the banks are able to borrow from the Bank of Greece, rather than the ECB, by putting up collateral that is theoretically more risky than bonds, such as small business loans or mortgages.
ELA also places the Bank of Greece and the Greek government in a precarious position because… the Greek central bank rather than the ECB is the one that bears the credit risk.
ELA, though, is not totally risk-free for the eurozone due to the way that deposits are transferred through a central payment system, known as Target2. “When a depositor in a peripheral economy moves their funds to a bank in another eurozone country, the payment is processed through the eurozone’s settlement system, creating a claim between the national central bank of the peripheral lender and the rest of the Eurosystem,” explains Neil Unmack of Reuters. “If it started to look like a country was seriously at risk of leaving the eurozone, depositors might move funds en masse to stronger countries, like Germany, with the banks in weaker countries funding the deposit run through ELA.”
And if the Bank of Greece is no longer good for the money?
Meanwhile, back to Sinn:
A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.
A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.
All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.
The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.
And so the game goes on.
Wait, there’s more (or, more accurately, less): Did I mention that Greece is back in recession? Having its economy shrink by roughly a quarter since 2008 has not, apparently, been enough.
New data published [Friday] morning has confirmed Greece plunged back into recession last quarter – just as International Monetary Fund (IMF) chief Christine Lagarde said this morning that a comprehensive deal with Greece to avoid it defaulting on loan repayments is “very unlikely… in the next few days”.
Data published by Elstat, Greece’s official statistics body, showed the economy shrank 0.2 per cent in the first quarter of the year, the same figure as the previous quarter. Investment by businesses and the government fell 7.5 per cent compared with the final quarter of 2014, while exports fell 0.6 per cent.