The Troika’s Leverage Over Greece: The Ongoing Bank Run

Written on March 29th, 2015 in politics Comments Off

Published on naked capitalism, by Yves Smith, March 27, 2015.

A substantial portion of the site’s commentariat has wanted to believe that the Greek government’s defiance of the will of the Troika has been effective, either in and of itself, or as a means of preparing the Greek public and buying time before a Grexit … //

… Here is how the bank run played into Greece’s already weak hand. From the Financial Times:

Greek companies and households pulled €7.6bn out of their bank accounts during the government’s standoff with its international bailout creditors in February, driving deposits down to €140.5bn — the lowest level in 10 years.

Although the withdrawals were lower than in January, the €20.4bn pulled out over the two months shows how close Greece came to a full-scale bank run before Athens reached agreement with eurozone authorities to extend its €172bn bailout into June…

Originally, Greece’s EU rescue programme was due to expire at the end of February. Repeated failures by the new Greek government to reach agreement with eurozone creditors led to a rapid speeding up of capital flight. Officials said that in the days before an extension deal was reached, almost €800m was being withdrawn from Greek banks every day.

Jeroen Dijsselbloem, the Dutch finance minister who led eurozone negotiations with Athens, told the Financial Times last month that the massive withdrawals were the primary force pushing the Greek government towards an extension deal.

“Mainly, the situation in the banks was becoming very urgent, and that was the biggest driver,” said Mr Dijsselbloem. “If you have large outflows from your banks, you can do that for a couple of weeks, but there becomes a point where it becomes too critical.”

Now bear in mind that the bank run was more severe in January, when Syriza took office, than at the end of February. However, the level of outflows in February was significant, and more important, was hitting a banking system that was already weakened. When banks lose deposits, the normal response is to sell assets to provide funding. But in reality, banks have limited liquidity buffers, and once the outflows exceed a not-very-high level, the assets sold will be less liquid ones. That means the bank will lose money via distressed sales, turning a liquidity crunch into a solvency crisis … //

… This is the scenario that is often described inaccurately as “accidental Grexit”. Bear in mind that any decision by the ECB to withdraw support would be no more an accident than the US refusal to backstop Lehman trading positions while Barclays got approval to buy the troubled firm. That decision was what left Lehman with no option other than to file bankruptcy. Paulson, Bernanke, and Geithner were under no illusion as to what the result would be. With the benefit of hindsight, they might deem it to be a mistake. But they’ve never tried pretending it was an accident. By contrast, the “accidental Grexit” meme in the media looks like an effort to pre-plant a narrative if the impasse continues and the powers that be decide the cost of letting Greece go is lower than the cost of the variances they insist on, given that Spain, France, Portugal and Ireland would also want the same breaks.

Mind you, Greece’s body language for the moment is that it will submit to the reform negotiation process. But we’ve had Greece buck the traces before. However, the threat of execution at dawn wonderfully focuses the mind. And Greece’s cash scramble and the resumption of its bank run shows that an endgame of some sort is approaching.

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… und noch dies:

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