When Fearmongering Goes Bad: Greece Scrambles To Prevent Deposit Run Goldman Warned About In Its "Worst Case"
Earlier today we got a classic, if rare, example of what happens when
bankers bluff with a 2-7 off suit... and the people call it.
Recall that just
over two weeks ago, none other than Greek currency swap
expert Goldman (alongside Jean-Claude Juncker who quite explicitly
warned Greeks not "to vote wrong") came out with a
fire and brimstone worst-case
scenario for Greece, which was nothing but an attempt at fearmongering
designed to scare Greek MPs into doing Samaras' bidding, in which it
said not electing the designated presidential candidate may lead to a
worst-case scenario which involves a
"Cyprus-style prolonged bank holiday."
For those who have forgotten, these were the
salient points from Goldman:
In the event that the parliament fails to elect a president, general
elections would be held and market uncertainty/pressures would extend.
At this stage it is important to understand that market pressures are
not linked to the democratic process of elections nor to a potential
government change, whatever the ensuing government formation may be.
They are linked to the risk of policy discontinuity and a severe clash
between Greece and international lenders. More specifically, we think
the room for Greece to meaningfully backtrack from the reforms that have
already been implemented is very limited. Any such attempt would lead to an interruption of official financing to Greece.
Examining the downside scenario.
To be sure, even in the event of a government change, there is room
for a cooperative solution between Greece and Europe. Greece has made
significant reform progress between 2012 and the gap between what has
already been implemented and what remains to be done is not
insurmountable.
Also, the incentives for a clash are not there. For instance any
Greek government would likely want to capitalize on the momentum that
the economy is building on the activity front, rather than trigger a
disruptive capital flight that would lead Greece to a double–dip
recession. In addition, given that more than 80% of Greek debt is held
by the official sector and given that any OSI would be feasible only as
part of an agreement with the Euro-area, there is an incentive for a
Greek government to pursue cooperative solutions.
However, the history of the Euro-area crisis has shown that the
probability of an “accident” can never be dismissed, when it comes to
intra-EMU politics. And it is important for markets to be able to
understand and quantify the aspects of a potential downside scenario,
where official financing to Greece is interrupted.
The Biggest Risk is an Interruption of the Funding of Greek Banks by The ECB.
Pressing as the government refinancing schedule may look on the
surface, it is unlikely to become a real issue as long as the ECB stands
behind the Greek banking system. In fact, refinancing became a lot more
pressing between 2011 and 2012. But financing needs were met despite
the impasse in negotiations between Greece and international lenders –
partly via the issuance of T-bills repoable at the ECB by Greek banks.
Such methods can always be revisited at times of extreme need.
But herein lies the main risk for Greece. The economy needs the only
lender of last resort to the banking system to maintain ample provision
of liquidity. And this is not just because banks may require resources
to help reduce future refinancing risks for the sovereign. But also
because banks are already reliant on government issued or government
guaranteed securities to maintain the current levels of liquidity
constant.
And this risk can become more pressing from a timing perspective. At
the heat of the Greek crisis, there was evident deposit and broader
capital flight, which Greek banks helped accommodate with ECB’s help via
the ELA facility. In
the event of a severe Greek government clash with international lenders,
interruption of liquidity provision to Greek banks by the ECB could
potentially even lead to a Cyprus-style prolonged “bank holiday”. And
market fears for potential Euro-exit risks could rise at that point.
Stripping all the political correctness, what Goldman said is that
unless Greece quickly folds back in line and does as unelected Brussels
eurocrats demand, there may well be a Cyprus-style bank closure coupled
with preemptied bank runs.
Oops. Because if that was the doubled-down bluff, then Greece just called it, and the "downside scenario" is now in play.
Which means
Greece now has to scramble to avoid precisely
what Goldman warned would happen if the Greeks dared to put their
(meagre) savings at risk. And, case in point, here is the Greek
finance minister rushing to squash the next steps, which - as Goldman
so conveniently explained - involve potential bank runs, a potential
bank holiday, and potential Cyprusing of the financial system, only this
time it is not Russian oligarchs who are most exposed - they have
learned their lessons by now - by ordinary Greeks.
Here is
Newsbomb.gr with what is sure to be an amusing backtracking on all the fearmongering that had been unleashed previously.
The government has guaranteed that bank accounts are safe and
legislated deposit safeguards in the event of a shakeup ahead of
Monday's parliamentary election for Greek president, Finance Minister
Gikas Hardouvelis said in an interview on Sunday's Vima.
Hardouvelis was speaking ahead of the third and last attempt by this
Parliament to elect a Greek president that will held on Monday, December
29. Failure to elect one
"We are preparing to withstand any rolling
and pitching. We have already passed laws safeguarding bank deposits,
and are in constant touch with our EU fellow-members, while the whole
government will be on alert and vigilant," Hardouvelis said.
Hardouvelis said that Greece must continue "to the next stage, which
will be based on our growth plan, under our own initiative, without
coercion by the troika of Greece's lenders."
Speaking of "bank deposits, which are safe," he said his ministry had
"taken care this past week and legislated the option of the Hellenic
Financial Stability Fund's to lend money to the Hellenic Deposit and
Investment Guarantee Fund if it needs greater reserves than those
available to support depositors."
Asked whether he thought that a new government might be elected with a
stance hostile to the memorandum, the finance minister replied, "The
key to avoid tossing and turning and our economy's future in 2015 and
later is held by the European Central Bank... This key can easily and
abruptly be used to block funding to banks and therefore strangle the
Greek economy in no time at all."
Actually no.
The ECB's hands are tied right now, because
the last thing Mario Draghi can do is proceed with open monetization of peripheral bonds (which
would have to be purchased in any ECB public QE alongside all other
Eurozone bonds) at a time when Greece can pull the rug from under the
ECB's already massive holdings of Greek public debt, and enforce a
haircut which would impair the ECB's balance sheet, in the process
costing Mario Draghi his job and a handing the victory to the "sound
money" Bundesbank on a silver platter.
Worse, should Greece decide to default it would means those several
hundred billion Greek bonds currently held in official accounts would go
from par to worthless overnight, leading to massive unaccounted for
impairments on Europe's pristine balance sheets, which also confirms
that Greece once again has all the negotiating leverage.
So with the ECB out of the picture, and with the ball in Greece's
court, it actually makes the situation that much more unstable, and
indeed could be just the precursor to the "Cyprus-style bank holiday"
that Goldman warned about.
How credible will this warning be in practical terms over the next
month as Greece prepares for a historic election? Keep an eye on those
lines in front of ATMs, because unlike Cyprus, at least the Greeks still
have access to Euros. The question is will they pull out enough Euros
before their only currency option in front of the ATM is New Drachmas?
20:07
Unknown
“Sound
money” has a clear message recognized for centuries around the world.
It describes the musical, metallic ring of a gold, silver, or copper
coin dropped on any hard surface of glass, stone, wood, or metal. Sound
money literally refers to real wealth, with a natural, unmistakable
signature of honesty and integrity, as opposed to the swishy paper and
plastic debt used almost exclusively today.
They
recognized that real silver had a distinctive melodious ring when
bounced on a hard surface, such as the blade of a handy sword, a bronze
breastplate, or an ornate marble floor. Sound money carried the 'ring of
truth,' while debased coinage landed with a dull, disappointing thud.
