Greek Capital Controls To Remain For Months As Germany Pushes For Bail-In Of Large Greek Depositors

Tyler Durden's picture

Two weeks ago we explained why Greek banks, which Greece no longer has any direct control over having handed over the keys to their operations to the ECB as part of Bailout #3's terms, are a "strong sell" at any price: due to the collapse of the local economy as a result of the velocity of money plunging to zero thanks to capital controls which just had their 1 month anniversary, bank Non-Performing Loans, already at €100 billion (out of a total of €210 billion in loans), are rising at a pace as high as €1 billion per day (this was confirmed when the IMF boosted Greece's liquidity needs by €25 billion in just two weeks), are rising at a pace unseen at any time in modern history.

Which means that any substantial attempt to bailout Greek banks would require a massive, new capital injection to restore confidence; however as we reported, a recapitalization of the Greek banks will hit at least shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year. And since Greek banks are woefully undercapitalized and there is already a danger of depositor bail-ins, all securities that are below the depositor claim in the cap structure will have to be impaired, as in wiped out. 

Now, Europe and the ECB are both well aware just how insolvent Greek banks are, and realize that a new recap would need as little as €25 billion and as much as €50 billion to be credible (an amount that would immediately wipe out all existing stakeholders), and would also result in a dramatic push back from local taxpayers. This explains why Europe is no rush to recapitalize Greece - doing so would reveal just how massive the funding hole is.

However, 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.

To be sure, we have explained this dynamic consistently over the past several months. Now it is Reuters' turn, which reports this morning that, far from an imminent end to capital controls, Greeks will be unable to access their full funds for months, if not years:

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

But as explained previously, new money will only arrive if and when the same banks suffer a confidence crushing stakeholder and/or a depositor bail in:

Rehabilitating the country's banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece's debt mountain?

And here is Reuters' realization of how our readers have known for months is a huge feedback loop dynamic:

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks. The longer it takes, the more critical the banks' condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers' ability to repay loans.


"The banks are in deep freeze but the economy is getting weaker," said one official, pointing to a steady rise in loans that are not being repaid.

Also last week Fitch calculated a Greek NPL number which we first suggested was accurate to much disagreement by the mainstream: it is now accepeted that more than half of all Greek loans are likely to be non-performing.

Fitch noted that the total amount proposed of 25 billion euros for the Greek bank recap is sufficient unless deferred tax assets stop being considered as core capital. According to Fitch, 45 percent of the four systemic lenders’ core capital consists of deferred tax assets. The agency estimated the capital requirements at 11.2 billion euros on the condition that nonperforming loans amount to 52 percent of loan portfolios, while the adverse scenario seeing bad loans at 60 percent would entail capital needs of 15.9 billion euros.

A 60% NPLs on €210 billion in loans would mean that up to 30% of Greek deposits of about €120 billion currently would be wiped out, or "bailed-in."

And that is the optimistic scenario. The likelihood is that the Greek economy has collapsed to a level where nobody is paying their loan interest or maturity. As such as an even greater NPL percentage is now quite probable. But one thing is certain: with every passing day in which Greece does not have a viable resolution of its banks, the NPLs will keep rising, and the ultimate deposit haircut will be that much greater.

As a result Germany is already demaning a bail-in of large depositors, those holding over the "insured" threshold of €100,000 with Greek banks, in a repeat of the Cyprus depositor bail-in template.

"We want, if possible, an initial amount to be ready for the first needs of the banks," said one official at the Greek finance ministry, who spoke on condition of anonymity. "That should be about 10 billion euros."


Others, including Germany, however, are lukewarm and could push for losses for large depositors with more than 100,000 euros on their accounts, or bondholders.

The amount of large depositors in Greece is about €20 billion according to Reuters calculations (far greater than the €3 billion in bonds issues which will certainly be wiped out in any major recap), which suggests that if a bail-in takes place, then some depositors with savings of less than €100,000 will also have to be impaired.

Furthermore, as we also explained a month ago, unlike in Cyprus where the biggest depositors were Russian billionaire oligarchs, who had zero leverage and even less sympathy with Europe's depositors, in Greece the situation could not be more different especially since the local shipping magnates keep the bulk of their cash overseas:

Imposing a loss, something the Greek government has repeatedly denied any planning for, would be controversial, not least because much of this money is held by small Greek companies rather than wealthy individuals.


"This is not like Cyprus where you can say these are just Russian oligarchs," said an insolvency lawyer familiar with Greece. "It's the very community everyone is hoping will resuscitate Greece, namely the corporates. You'll end up depriving them of their cash."

None of this should be a surprise either: recall in June 2013 we explained that "Europe Make Cyprus "Bail-In" Regime Continental Template." But while the French member of the ECB, Christian Noyer, is against depositor bail-ins, Germany is all for it:

The tone in Berlin is different, where some advocate not only that bank creditors foot the bill but also that the ESM steer clear of any direct stake, lumbering Athens with the banks' clean-up.


"The recapitalization will have to be done by the Greek government so that means more money in the third program," said Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research. "It's a loan they have to repay but there is no risk-sharing on the European side. They will have to bail in the private creditors. I can't see how this could not happen."

The most likely outcome for the Greek banks is a wholesale bailout by the ESM. That, however, comes with major strings attached:

One option, according to euro zone officials, is the direct recapitalization of Greece's banks by the euro zone's rescue fund, the European Stability Mechanism (ESM).


This could grant the Luxembourg-based authority a direct stake in the banks and greater control over their future.


That, however, would take Greece closer to the Cyprus model. Any such direct ESM aid requires that losses first be imposed on some of the banks' bondholders and even large depositors.

So Greece is damned if it does, and damned if it doesn't.

And here is why we made such a big deal of Greece handing over controls of its banks to the ECB as we reported in mid July:

To avoid such orders, Athens is battling to keep autonomy in deciding the fate of its banks. Ceding further control could cost it dearly. Bondholders are nervous.

Alas, Greece already ceded control, remember: that was one of the main conditions for the Third Greek bailout, all of which we explained on July 13 in "Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent."

At this point the only leverage Greece may have, having squandered all of its true leverage when it decided not to pursue a "parallel-currency" system after the Referendum, is mere empathy with the rest of Europe's population; however with its ruling socialists backtracking on all their promises and in fact pushing Greece into an austerity program harsher than anything seen yet, not even the leftist parties in Europe care any more if Tsipras' government survives.

Indeed, Reuters summarizes the situation quite well when it says that "with its economy starved of cash and the threat of its departure from the euro zone hanging over talks, Athens' room for maneuver is limited. One euro zone official summarized the mood: "Whatever sympathy there was for Greece has evaporated."

Which is indeed the truth, and this time, Greece only has itself to blame.

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Deathrips's picture

"Thats MY bike Punk."





El Oregonian's picture

Oh. I get it. My capital; that you control.... right.

VinceFostersGhost's picture



Large Greek Depositors


All 2 of them....


Thank goodness for them....we're saved!

Singelguy's picture

Any large Greek depositor that didn't get his or her money out 6 months ago, deserves to get a haircut! Idiots!

philipat's picture

Ghordius? In the meantime, IM ("Narrow Anglo-Saxon perspective)HO, Germany is fucking itself out of fear that Portugal, Spain, Italy and then France will want to dip into Germany's pockets. But that is how "Unions" work, as in The US where the richer States such as California, subsidize the pooer States, such as Louisiana?

Germany can't have it both ways. A weak Euro has created a massive German Trade Surplus so it seems time for Germany to decide what it really wants?

Publicus's picture

If the Greek people do not revolt, then they deserve everything that is coming for them.

ZD1's picture

California is a richer state? The state and local governments have trillions in unfunded pension liabilities.


Ghordius's picture

"But that is how "Unions" work, as in The US where the richer States such as California, subsidize the pooer States, such as Louisiana? "

and how does it work, exactly? is there a gremium of econometrists that calculate how much poorer states like Louisiana "lose" because they don't have an own currency to devalue, and set up a bill for richer states like California to pay? no. it's "just politics", isn't it? of the kind also called "pork barrel" politics

as a reminder, the German trade surplus is still half inside and half outside of the eurozone

Jaspergers's picture

Was talking to someone recently who kept her money in the (greek) bank for patriotic reasons. Not a large depositor, 10s of thousands, but still, pretty mindblowing.

realmoney2015's picture

I had a conversation with someone about Greece yesterday. He thought the whole situation was better know because they came to an agreement. I try to tell him otherwise...This shows that the whole Greece and Euro show is just getting started.


Augustus's picture

I thought the ZH crowd all agreed that the Greek problem was solved when Puutie created that BRICs bank a few months ago.  That bank should be able to supply whatever is needed by the Greek central bank to shore up the NPL problem.  It would be entirely possible for that bank to take out the IMF funding that is really putting pressure on the Greek govt.  Why is Puutie making these socialists suffer?

crazytechnician's picture

Your bank balance is nothing more than an unsecured loan from you to your bank.

Bitcoin user NOT affected.

Anopheles's picture

And bitcoin is secured by absolutely NOTHING. 

Banks have physical assets in the form of liens on properties for the majority of their mortgages and loans.   If you get an unsecured loan from a bank, then the interest rates are higher to cover risk (ie credit cards). 

crazytechnician's picture

Obviously you have never heard of Cryptography... Good luck down there wallowing in your ignorance.

Anopheles's picture

What has cryptographypy to do with the value of bitcoin?  It's like saying cash is safe becasue it's stored in a secure vault. 

But cash stored in a secure vault doen't mean the value of that cash can't go to zero.  

You witness ignorance every morning when you look in the mirror. 


crazytechnician's picture

No , I just laugh at dumb a$$es like yourself. All value is subjective , there is no such thing as intrinsic value. Now , go back to your map of the Flat Earth , you will need it after the armageddon to locate that lake.

wendigo's picture

If bitcoin was as great as you clowns say it is, you would educate people on its greatness and not insult them. Just a thought. 


The point was perfectly valid. The 'value' of bitcoin will go to zero far faster than the 'value' of gold will. I'm certain I can find someone on the globe who will trade me a potato for an ounce of gold. This will always be true, in all cases, no matter what happens. If I die and my stash lays undiscovered for a thousand years, eventually someone will find it and it will be worth something. 

The same cannot be said for bitcoin. In a thousand years no one will even know bitcoin existed. 

crazytechnician's picture

In a 1000 years time kids will be able to make gold at home. You need to do more research.

Anopheles's picture

That's exactly the same thing alchemists said 1000 years ago. 

Augustus's picture

And bitcoin is secured by absolutely NOTHING. 



Even the non-performing loans on held be the banks will have some value, even if not 100%.

crazytechnician's picture

That is incorrect , bitcoin is secured by Cryptography.

Bunga Bunga's picture

And by what are those assets secured? Nothing! There is no guarantee that you can sell them for the price you think they represent. The market decides what you get for it, the same is true for bitcoins. 

Bangin7GramRocks's picture

"Greece got knocked the fuck out!"



KnuckleDragger-X's picture

Your life, your money and your world, belongs to us peasant, now back to the salt mines.....

Blopper's picture

By right there should be NO BANK RUN whatsoever, because debt is effectively and practically created out of nothing, and any lack of reserve can be funded by interbank lending or central bank lending.

This is engineered falsehood.

Anopheles's picture

Except when you take out a loan/mortgage, it's backed by YOUR physical assets.  So despite what you might believe, the bank WILL seize your physical assets backing your loans. 

Blopper's picture

What you talk about is UNrelated to what I talked about.

Please re-read my statement over and over again until you understand.

Anopheles's picture

I'm referring to your "created out of thin air" statement. It might be created out of thin air for you to borrow, but that doesn't mean there's nothing attached to it. 

Same with the interbank and central bank transfers.  The central banks can't create capital out of nothing, without MASSIVE inflation.   And since the Euro is not Greece's own, closed currency, there isn't much they can do about it.  The bank's balance sheet also have to balance, and their loans need to be backed in some way, either through physical assets, or a high interest rate to cover potential losses (think credit cards). 



Kprime's picture

so who was smarter?  The banks loaned you money created out of thin air against your physical assets.  When you deposited your money in the bank you loaned them money against thin air.

When it all comes down, you get thin air and they get your assets for doing absolutely nothing but pulling the wool over your eyes.

shovelhead's picture

The debt death spiral is complete and has entered into a black hole state.

Happy Euro-ing.

williambanzai7's picture

We wait for zee Germans to arrive...--Snatch

glenlloyd's picture

They'll be coming for the gold unless it's already been 'ukrained' out of the country.

Omega_Man's picture

Why did the Greeks think they would be treated humanely?

thunderchief's picture

They deserve everything they get after Tsipras rolled over gave them everything. 

Come to think of it, the Troika should start a dogshit sandwich line right in front of the central bank in Athens, just to let them know who hands out the free lunch from now on.

Navymugsy's picture

Same shit they did to us on Cyprus. Months and months of not being able to access significant amounts of money. Who's next if they get away with it in Greece? Protugal? Italy?

Allen_H's picture

I am hoping the other European countries are looking closely at this and thinking that it could be them next, it is like being thrown with cold water, these countries should be thinking about a get out strategy, or just how to destroy Brussels and the dictatorate in the EssU.

I am still surprised that when they were were sold out by the local government, the pitchforks never came out ! It was the time to tell them then that it was not the will of the people.

Monetas's picture
Monetas (not verified) ciscokid Jul 26, 2015 10:07 AM

The pain in Spain .... stays mainly in the plain !

crazytechnician's picture

All you need is NPL ratio data , once it crosses a certain threshold then bank closure becomes mathematically inevitable. Greece NPL bad data was 2 years behind during the Cyprus bail-in , now Italy and Portugal are exactly where Greece was 2 years ago , so ...... 2 years max before the real shit hits the fan.

Anyway , Bitcoin user NOT affected.

Amraphel's picture

interesting the first part of your comment, would like to upvote for that but the bitcoin comment says no. if i'm a poor greek or anyone else for that matter it's likely i can't afford or prudently will not spend/waste money on internet or mobile. now, if i also have some skill such as food production etc. i have no use for bitcoin but i would trade for something useful. that includes pm's

crazytechnician's picture

"but i would trade for something useful. that includes pm's"

Yeah , pm's are edible. They can also be confiscated , try getting them through an airport. With bitcoin you can send a million dollars to the middle of a desert in australia in a couple of seconds from anywhere on Earth. Bitcoin does not acknowledge borders or Capital Controls.

Renewable Life's picture

this is true and it will be a valuable weapon for the elites and has been up until now, the masses of humanity however, better start getting a bunker they can defend

slammin_dude's picture

Shitcoin....that which came out of a NSA incubator is obviously designed to circumvent "the system".....

"No one will take your gold or silver for food and supplies in a crash....blah blah" is the delusion that western idiots who've never been through crisis or loss of property or dealt with the black market in other countries. Maybe some basement trolls who have nothing to offer won't take gold/silver....but the farmer with food, the guy selling ammo and ur,pharmacist will definately take gold and silver. And an ounce of silver will buy you a weeks worth of food, not a loaf of bread

Batman11's picture

Placing the blame doesn't help the creditors get there money back.

Debt reductions early on would have provided creditors with the lowest losses.

Tip - Don't lend money to people who can't pay it back.

It's called prudent lending.

Allen_H's picture

But that money only existed in digital, and was backed by nothing, and went to the banks that created out of thin air in the first place, it called a CON. And its theft.

glenlloyd's picture

This has all gone on way too long. And yes, the creditors are to blame in this case for ever having lent Greece more to begin with. Now we're at a third 'programme' and it's not'll never be over, it's just prolonging the inevitable.

In this case the third time is not the charm, it's just throwing good money after bad....

wmbz's picture

The hopeful and the clueless serfs will never understand, as they continue to be ass raped by their overlords.


Banksters Inc. = 1  You = 0 for ever and ever!

Pure Evil's picture

Is that 0 the peasants a-hole where the Bankster Inc stick their 1.