Bank Run

The IMF failures in Greece bring back vivid memories of the Asian Financial Crisis of 1997-98... As the Indonesian episode should teach us, the IMF’s management can be very political and often neither trustworthy nor competent. Greece offers yet another chapter.

With every passing day that Greece maintains its capital controls, the already dire funding situations is getting even worse, as Greek bank NPLs are rising with every day in which there is no normal flow of credit within the economy. This has led to a massive bank funding catch-22: the longer capital controls persist, the less confidence in local banks there is, the longer the bank run (capped by the ECB's weekly ELA allotment), the greater the ultimate bail out cost, and the greater the haircut of not only equity and debt stakeholders but also depositors.

Despite the imploring of Greek bankers for Greeks to "take your money out of your chests and houses – which are not safe in any case – and deposit at banks," it appears the Greek bank deposit run continues. As The ECB just announced another €900 million increase in Emergency Liquidity Assistance, strongly suggesting that in the 2 days since the last increase, banks are once again insolvent facing a liquidity crunch as the "banks are trustworthy" propaganda falls on very deaf Greek ears.

President of Greek Banks Association Louka Katseli appealed at the citizens to return their money to the banks. “Banks are absolutely trustworthy,” Katseli told Mega TV, “Let’s all help our economy... If you take your money out of your chests and houses – which are not safe in any case – and deposit at banks, this will enhance liquidity.” Katseli’s appeal triggered laughter among Greeks with one exclaiming “Ah sure! Banks will never see my money again, I prefer to buy tonnes of peanuts with it.”

Capital controls imposed by the Greek government are taking a heavy toll on Greek businesses, according to a new report from Endeavour Greece. With over two-thirds of respondents reporting a "significant drop in revenues," and 1 in 9 firms forced to suspend production due to shortages of raw materials (unable to buy due to capital controls), the problems created by The Greek government's action seem asymmetric as almost a quarter (23%) of firms are now "planning to transfer their headquarters abroad for security, cashflow, and stability reasons."

Remember when Greece was fixed... when The ECB extended its ELA to Greek banks and bridge loans were provided to repay The ECB? As we noted previously, it seems Greek banks are a sell at any price and today's continued crash in National Bank of Greece ADRs ahead of 'supposedly' a Greek bank re-opening on Monday, suggest "mark it zero" is coming soon to some knife-catchers' portfolios.

Even as Greek banks, severely depleted of cash and eligible collateral they can post with the ECB, stand to fight another day (and potentially face more withdrawals as soon as the Greek banks reopen supposedly on Monday) thanks to another €900 million liquidity infusion, investors in Greek bank shares will be less lucky: "to ensure a new bailout, investors in the country’s banks faced the prospect of their holdings being "wiped out" under the terms of a €25 billion recapitalization plan."

As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

Comments by Greek Prime Minister Alexis Tsipras on Tuesday evening undermined trust that Greek govt will take ownership of economic adjustments in new bailout program, German Deputy Finance Minister Jens Spahn says on ARD public television. Spahn is a member of Chancellor Angela Merkel’s CDU party.  “What the Greek prime minister did on Greek television yesterday irritates me."

The Simpsons was right all along...

Even with a deal in place and a new program for Greece on the horizon, the country's banks are by no means in the clear as deposit outflows, limited breathing room under ELA, and deteriorating asset quality present formidable stumbling blocks going forward.

It's officially Groundhog day... and month... and year... and so on.

According to Colin Lancaster, senior managing director with Balyasny "we now have another 48 hours of calm before things really start happening", and the punchline: "situation could then break down as banks stay closed, ATMs will run out of cash Tuesday or Wednesday, uncertainty grows and rioting possible."

Meanwhile, Greece defaults on an ECB payment nobody remembered...

... at this very moment, politicians from Spain's Podemos to Italy Five Star movement are drafting memos demanding that the IMF evaluate their own debt sustainability. Or rather unsustainability.