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"Bonds Don't Bring Breakups, Banks Do"; UBS Says Europe Risks Bank Runs On Grexit

Tyler Durden's picture




 

Earlier today, we reported that Germany is preparing a contingency plan to deal with the fallout from a Greek default, the odds of which analysts are now putting at even money. According to Die Zeit, Berlin is looking at options to keep the Greek banking sector solvent (i.e. make sure there are still euros in the ATMs) even in the event Athens misses a payment to the IMF next month. Germany also indicated it was prepared to let Greece go should Tsipras, Varoufakis, and their merry band of Syriza socialist saviors be unwilling to adopt reforms in exchange for assistance to the banking sector. In the event the Greek government remains steadfast in its “where’s our money” approach to negotiations, Brussels will reportedly assist the country in transitioning back to the drachma. In the midst of the (continuing) drama, UBS is out with a new note which warns against adopting the idea that a Grexit would prove to be an isolated event. Here’s more:

Investors seem to have embraced the belief that if Greece were to walk away from the Euro, it would walk alone with minimum contagion to other countries. This belief is dangerous. UBS does not believe Greece will leave the Euro as our base case scenario. However, if Greece were to depart, there a distinct possibility that other countries would join Greece in exiting the monetary union. This is because of the way contagion is spread in a monetary union breakup, and it could happen within months of a Greek departure…

The chart gives some indication of the complacency of markets. Interest in a Greek exit from the Euro (as signified by Google searches for the somewhat irritating portmanteau "Grexit") recently reached an all-time high, but the relative concern for a wider Euro area problem has seemingly fallen far below the levels of 2011 and 2012. 

UBS goes on to caution investors against attempting to take anything away from an assessment of eurozone sovereign spreads vis-a-vis GGB yields. The logic is simple: spreads simply don’t mean anything in the face of excessive monetary easing:

The complacent suggest that while Greece continues to have significant fiscal problems, other member states in the Euro area have fewer significant fiscal problems (as reflected by bond prices), and thus a Greek exit from the Euro would not provoke a reaction in other bond markets…

 

This syllogism seems appealing, but it ignores the distorted nature of modern bond markets. Indeed it is a moot point as to whether a bond yield today contains any useful information about the real economy or the risks that surround it, given the consequences of financial repression acting in concert with quantitative policy…

 

Bond markets are unlikely to be the catalyst for a monetary union breakup, and probably not a terribly good signal of the threat. Investors should take little comfort from the current narrowness of bond spreads or the behaviour of Euro area government bond markets. 

The simple fact of the matter is that it is redenomination risk that could fuel an EMU breakup. That is, if people no longer believe that the union is indissoluble and instead begin to view the whole ill-fated experiment as little more than a set of fixed exchange rates, all bets are off and it won’t even matter who is solvent and who isn’t when the depositors are beating down the doors.

When examining the risk of contagion from any possible Greek exit from the Euro we come back again and again to the fact that in every monetary union collapse of the last century, the trigger for breakup was not the bond markets, current account positions, or political will, but banks. If ordinary bank depositors lose faith in the integrity of a monetary union they will hasten its demise by shifting their money out of their banks – either into physical cash, or into banks domiciled in areas of the monetary union that are perceived as "stronger". Both of these traits were evident in the US monetary union breakup, and have been in evidence in more recent events this century. The contagion risk after a possible Greek exit arises if bank depositors elsewhere in the Euro area believe that a physical euro note held "under the mattress" at home today is worth more than a euro in a bank – because a euro in a bank might be forcibly converted into a national currency tomorrow. In a breakup scenario it is more likely that retail bank deposits withdrawn will end up as physical cash, owing to the difficulties of opening and using a bank account in a different country.

 

This is not a question of banking system solvency. Highly solvent banks will be subject to deposit flight if it is the value of the currency in that country that is uncertain…

 

The contagion story is serious. Even if a depositor thinks that there is only a 1% chance their country will exit the Euro, why take a 1% chance that your life savings are forcibly converted into a perceived worthless currency if by acting quickly (and withdrawing deposits) one can have 100% certainty that your life savings remain in Euros?

 

If Greece were to walk away from the Euro, then the policy makers of the Euro area would have to convince bank depositors across the Euro area that a Euro in their local banking system was worth the same as a Euro in another country's banking system, and that the possibility of any other country exiting the Euro was nil. If that double guarantee was not utterly credible, then the risk of other countries joining Greece in exiting the Euro would be high.

 

This suggests that financial markets are treating the risks around Greek exit with too little regard for the probable dangers. 

 

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Wed, 04/15/2015 - 22:03 | 5997281 ekm1
ekm1's picture

Days or weeks, not months.

It's over

 

Military complex is winning

Bank lobby is losing

Wed, 04/15/2015 - 22:26 | 5997332 the great rift
the great rift's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Wed, 04/15/2015 - 22:50 | 5997403 aerohelo
aerohelo's picture

Ba, ha, ha, ha!!! 7,000 bucks a month! Is that all? What a loser! I make more than that every day with my no risk, no investment, proven, dynamic, money generating, wealth accumulation plan previously only known to the Mayans. To learn more go to www.sendmemoneysuckers.com

Wed, 04/15/2015 - 22:55 | 5997404 aerohelo
aerohelo's picture

Please note when sending me money to www.sendmemoneysuckers.com I only accept bitcoins denominated in renminbi.

Wed, 04/15/2015 - 22:44 | 5997386 WillyGroper
WillyGroper's picture

they're winning alright. do you ever look up at the milky skies?

https://www.youtube.com/watch?v=V5y1WorkLJw

Wed, 04/15/2015 - 22:05 | 5997287 Thirst Mutilator
Thirst Mutilator's picture

Who else cried when 'Ol Yeller' died?...

 

Come on!... I cried my eyes out!

Wed, 04/15/2015 - 22:41 | 5997379 Lets Buy The Dip
Lets Buy The Dip's picture

I most certainly did. 

Look at the scam they run in crude but. THEY CRASH CRUDE DOWN, and now myseriously CRUDE is flying up to the moon, and so to the market. 

When will we learn. Lots of people losing money in the market at the moment, and those shorting crude, good luck. 

WEEKLY CRUDE CHART LOOK insanly good here, ==> CHART HERE [insane chart porn]

 

I bet you bernanke is crying in his jim jams, he can no longer come in and ruin things more. I bet you he is pulling strings behind the curtains but. No doubt. :-)

Wed, 04/15/2015 - 22:12 | 5997304 NoDebt
NoDebt's picture

I have seen little fear in Europe of bank runs.  It just hasn't happened.  Cyprus there was little forewarning, but in Greece things have been dire for months now.  There was a bit of a run, but so far no Greek bank has collapsed, and it's not like they're the healthiest institutions to begin with.

And now we're to believe that Greece exiting the Euro will cause continent-wide bank runs within a few months?  I have my doubts.

 

Wed, 04/15/2015 - 23:08 | 5997472 Al Tinfoil
Al Tinfoil's picture

And the move by Austria to disown its Hypo "bad bank" Black Hole of Debt by imposing a moratorium on bond payments is nothing to worry about, even as Bayern LB and other EU banks announce that they may have to write off several Billion Euros, and faith in senior bank bonds is at risk.  Nor is it any worry that Austrian banks are badly exposed to risky loans to eastern European and Balkan entities.  Greece and Ukraine now have equal credit ratings.  Italy is coping with limits on its budget deficit under EU banking rules by simply not paying its trade creditors.  Banks in Greece, Spain, and Portugal have met capital reserve requirements by posting possible future tax credits as current capital.  Spain's banking sector is seeing recurring collapses. Andorra's banks are tottering.  The ECB is now trading Euros for sovereign bonds in an attempt to inflate the EU economy.  The only thing that is keeping the Greek banks ahead of the run of withdrawals is advances under the ECB's Emergency Liquidity fund, and they keep bumping up against the upper limit as the ECB repeatedly raises that limit.  But the ECB refuses to buy Greek bonds, and will not advance funds to Greek banks on Greek government bonds as collateral.

Everything is Awesome. What could possibly go wrong?

Thu, 04/16/2015 - 01:28 | 5997779 AbbeBrel
AbbeBrel's picture

"Awesome" summary, AIT. +1

Thu, 04/16/2015 - 09:47 | 5998452 rex-lacrymarum
rex-lacrymarum's picture

Note also the recent move to end ALL government deposit insurance in Austria: http://www.acting-man.com/?p=36884

Wed, 04/15/2015 - 23:09 | 5997478 back to basics
back to basics's picture

UBS grossly underestimates the stupidity and complacency of the sheeple

Thu, 04/16/2015 - 02:08 | 5997830 basho
basho's picture

that's giving UBS more credit than they deserve.

Thu, 04/16/2015 - 01:01 | 5997734 Global Observer
Global Observer's picture

And now we're to believe that Greece exiting the Euro will cause continent-wide bank runs within a few months?

It depends on what Greece does when they exit the Euro. If they force convert all Euro deposits in Greece to the new Drachma and enforce capital controls or the new Drachma drops in value dramatically against the Euro, it may lead to bank runs elsewhere in the Eurozone, espcially the countries in the periphery that can be expected to exit the Euro.

 

If Greece doesn't force convert existing Euro deposits in Greek banks to the new Drachma, doesn't impose any capital controls and the new Drachma maintains its value against the Euro or even appreciates, there is no reason for bank runs elsewhere in Europe. But in order for that to happen, the new Drachma regime will have to be drastically different from any current fiat currency regime i.e, one where banks will have no ability to create money. Yanis Varoufakis certainly has the ability to create such a regime. Remains to be seen whether Syriza and Greece will stand behind him if and when he tries to do that.

Thu, 04/16/2015 - 04:52 | 5997957 Kaervek
Kaervek's picture

I don't believe they even thought about a "new" system for a second, the whole point is to devalue all their peoples money. Best way to do this would be to print their own.

Wed, 04/15/2015 - 22:12 | 5997305 Omega_Man
Omega_Man's picture

gooooold

Thu, 04/16/2015 - 00:19 | 5997654 Dead Canary
Dead Canary's picture

Seeelllliiiivvvvveeeerrrrrrrr!

Thu, 04/16/2015 - 06:55 | 5998037 Marco
Marco's picture

The only good reason for bimetallism there ever was was for smaller denomination coins ... and even that wasn't worth the cost in the enddddd.

Wed, 04/15/2015 - 22:23 | 5997324 walcott
walcott's picture

free government sponsored prostitution of every citizen in the world the final solution

the senator then comes to your house and you say fuck my wife please and

record this on your iphone for your friends

Wed, 04/15/2015 - 22:25 | 5997329 q99x2
q99x2's picture

Here come the banker terrorist threats. What do they want $785 billion? Here's the idea then. What we'll do is write them a check for a trillion or whatever they want, give the people disability, student loans, food stamps and then build up a military force to kill the citizens by the time the system collapses. Hows that for a plan suckkas.

Wed, 04/15/2015 - 22:26 | 5997334 besnook
besnook's picture

bomb them like a good nazi would. that will keep greece in the fold. heil merkel!

Wed, 04/15/2015 - 22:26 | 5997335 max2205
max2205's picture

No Greeks have euro in their accounts by now 

Wed, 04/15/2015 - 22:32 | 5997349 Goldilocks
Goldilocks's picture

Vanquishing Ignorance
http://www.hermes-press.com/ignorance.htm

"Evil actions are the result of ignorance." - Plato

"Ignorance may be conveniently divided by the legislator into two sorts: there is simple ignorance, which is the source of lighter offences, and double ignorance, which is accompanied by a conceit of wisdom; and he who is under the influence of the latter fancies that he knows all about matters of which he knows nothing."

Wed, 04/15/2015 - 22:33 | 5997355 thinkmoretalkless
thinkmoretalkless's picture

Nothing seems to spook the herd...their eyes are else where. The smell of smoke is ignored...the shouts of "fire!" Ignored.... It all points to a quick and violent reaction if the debit card doesn't work.

No one should fret....Hillary is looking out for them...

Thu, 04/16/2015 - 02:22 | 5997847 dreadnaught
dreadnaught's picture

alas, their eyes are all on Kim Kardashians ass.....until she gets a tweet from her bank(s) that her accounts are frozen, THEN TS will hit TF

Wed, 04/15/2015 - 22:46 | 5997397 Blopper
Blopper's picture

If they let you know it in advance, then it probably won't happen.

Thu, 04/16/2015 - 00:39 | 5997702 TeraByte
TeraByte's picture

Que molestia de  the great rift spammer ay ay ay or in any other his disguises, which remain unblocked. It is not of my interest, how this pimp makes living, women laying on laptops or on any other, but  allowing this unsolicited advertising should not really be a part of this forum.

 

Thu, 04/16/2015 - 01:24 | 5997774 hairball48
hairball48's picture

Didn't the Greeks see this movie? "Take the Money and Run"

Thu, 04/16/2015 - 02:08 | 5997827 basho
basho's picture

f*ck the banks.

once and for all.

Thu, 04/16/2015 - 02:22 | 5997846 Firewood
Firewood's picture

So German banksters will end up begging Greeks to keep using their filthy €urodollah toilet paper.

Thu, 04/16/2015 - 04:03 | 5997915 are we there yet
are we there yet's picture

If things get bad in euro land then the USA can loan Europe the Kardashian family to distract the euro-sheeple.

Thu, 04/16/2015 - 04:50 | 5997955 Which is worse ...
Which is worse - bankers or terrorists's picture

Or, giving the Louisiana Purchase back to France as a voidable transaction might work. 

Thu, 04/16/2015 - 04:09 | 5997921 BoPeople
BoPeople's picture

If Europe is so fragile, then it deserves to die. However it will not.

My personal belief is that there is strength in a diversified portfolio of countries, currencies and governments. Putting all of one's eggs in the Euro basket enhances risk.

Thu, 04/16/2015 - 14:26 | 5999656 JenkinsLane
JenkinsLane's picture

"Guns don't kill people, rappers do."

https://www.youtube.com/watch?v=VXzFp1lshBE

 

 

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