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Goldman Pops The "Deus GrEx Machina" Balloon

Tyler Durden's picture




 

While hard information is scarce, concerns about deposit flight from Greek banks have increased since the 6 May elections. To the extent that such flight arises from liquidity concerns, the ECB can contain it (or its impact) via its various monetary policy and ELA operations. But, as Goldman Sachs notes in its Focus today, the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities. However, attractive in principle, even Goldman agrees with our skeptical perspective that it is unlikely that such a guarantee can be implemented credibly in short order. And thus pops the latest straw being clutched at by failing Deus GrEx baloons, to butcher a countless number of metaphors...

Goldman Sachs Focus: Meeting deposit runs in the Euro area

Are we experiencing a run on bank deposits in the Euro area? Hard information is scarce. We will not get the May official data on the evolution of bank deposits by country until towards the end of June. Bank balance sheets are only reported for accounting purposes on a quarterly basis. But the authorities have expressed concerns, particularly in Greece.

Is deposit flight something new?

 As illustrated in a series of Global Market Dailies by Robin Brooks, we have seen evidence of deposit flight from some countries throughout the ongoing financial crisis, even if this is hard to distinguish from other processes such as deleveraging which have also served to shrink the size of bank balance sheets. On the basis of developments in household deposits relative to nominal GDP (shown in Chart 1), falls in household deposits have been particularly acute in Greece, with more modest falls or stagnation in Ireland, Spain and Italy. Portuguese deposits have shown a higher degree of resilience.

How much further can deposit flight go?

Chart 2 shows the remaining stock of household deposits in peripheral countries’ banking systems. These total almost EUR 2 trillion. By nature of their size, Spain and Italy stand out, accounting for approximately EUR 1.5 trillion of household deposits between them. Were deposit flight to infect these countries, the magnitude of the issue would be a quantum bigger than what we have seen thus far.

 

What policy measures can contain a deposit run?

Where deposit flight is triggered by liquidity concerns – that is, the bank may not be able to generate cash quickly enough to meet withdrawals – then the central bank has a role to play in following Bagehot’s rule for lenders of last resort: lend freely against good collateral at a penalty rate. Such an approach can ensure that banks never run short of liquidity. Banks thus don’t fall victim to a ‘self-fulfilling prophecy,’ where the perception of liquidity concerns leads to a withdrawal of deposits that validates the original perception and causes an acceleration of withdrawal. The ECB already provides unlimited liquidity to banks via its full allotment monetary policy operations against a very broad set of eligible collateral. And the ECB has shown willingness to expand the definition of eligible collateral and/or shift banks with collateral shortages to emergency liquidity assistance (ELA) so as to maintain the flow of liquidity. Such actions are ongoing: as long as the ECB is prepared to keep them in place, they should ensure that banks undergoing bank runs do not face liquidity shortages.

But where banks are suffering deposit withdrawals owing to concerns about the solvency of the bank, a central bank lender of last resort may not be sufficient. While the ECB can offer a liquidity guarantee, it cannot guarantee the solvency of deposits: that is a fiscal responsibility, which lies outside the mandate of the central bank. Should the ECB offer to guarantee deposits in the face of bank insolvency, it would be taking over the role of the fiscal authorities and, as such, violate the Treaty’s prohibition of monetary financing. This would be likely to lead to a legal challenge to the ECB’s actions in the European Court of Justice.

Of course, the distinction between liquidity and solvency problems is not easy to draw in practice, especially in real time. And any willingness of the ECB to extend ELA to banks against collateral of questionable quality would entail the assumption of some fiscal risks. Nevertheless, in our view, to be credible a deposit guarantee must be underwritten by the fiscal authorities.

What are the characteristics of a credible deposit guarantee?

In current circumstances, a deposit guarantee would need to be pan-Euro area in nature. While depositors believe that the fiscal backing offered by the deposit guarantee is worth more in some jurisdictions than in others (owing to variation in the underlying fiscal strength of the countries concerned), then depositors will have an incentive to switch deposits to the fiscally stronger country. A pan-Euro area guarantee would eliminate this incentive: the fiscal backing for the deposit is the same regardless of the bank’s location.

Moreover, deposit flight may be triggered by the perceived threat of capital loss should the deposit be redenominated in a different currency as one country exited the Euro area. In this context, a credible mechanism to halt deposit flight would need to guarantee the Euro value of the deposit. But the willingness of other countries to honour a guarantee to make deposits good in Euro terms at banks in a country that has exited the Euro area (possibly in acrimonious circumstances) is, at best, open to question. As a result, the credibility of such a guarantee may be low. This is one example of how admitting the possibility of Euro area exit opens up a Pandora’s Box that makes maintaining the integrity of the Euro area and its financial system more challenging.

How close are we to a pan-Euro area deposit insurance scheme?

Proposals for the introduction of a pan-Euro area deposit insurance scheme were apparently discussed at the G8 summit over the weekend and may resurface at this evening's informal EU summit. But the challenges to the introduction of such a scheme are formidable.

Politically, it will not be domestically popular in Germany (inter alia) to extend such guarantees, however much Germany may benefit from arresting the financial instability deposit runs may cause. Legally, the German constitutional court has limited the scope for the German authorities to widen its financial obligations towards the rest of the Europe: a pan-Euro area deposit guarantee would be a significant extension of such liability and therefore may require further legal consideration. And institutionally, in order to contain the threat of free-riding on the guarantee of others, entering into a pan-Euro area deposit guarantee would need to be associated with a deepening of the pan-Euro area system of financial supervision and regulation. This would involve substantial loss of sovereignty relative to the status quo and require significant institutional innovation.

For all these reasons, we doubt that a credible pan-Euro area deposit insurance scheme can be introduced in short order. To be credible, legally sound and institutionally robust -- in other words, to work -- such a scheme will need to be developed over a longer period.

Source: Goldman Sachs

 

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Wed, 05/23/2012 - 14:33 | 2455996 Cult_of_Reason
Cult_of_Reason's picture

What bulls do not realize that if the eurocrats decide that Greece has to exit the euro, nobody will announce it at 3 pm.

They will do it unexpectedly over the weekend (a 3-day weekend is the best window to do it).

Wed, 05/23/2012 - 14:37 | 2456015 dasein211
dasein211's picture

Good call. It's a game of grexit chicken. Does germany cut Greece out and cut our losses when the election is so close or do they wait until its too late. Three day weekend would be the best. Germany has to know its inevitable anyway.

Wed, 05/23/2012 - 15:07 | 2456122 iDealMeat
iDealMeat's picture

June 4th is a Bank Holiday (UK)..

 

Wed, 05/23/2012 - 14:37 | 2456019 battle axe
battle axe's picture

you are right, this would be the weekend to do it, it would give them some extra breathing room to set it up. 

Wed, 05/23/2012 - 14:45 | 2456047 bdc63
bdc63's picture

Memorial Day is a US holiday

Wed, 05/23/2012 - 14:48 | 2456060 Waffen
Waffen's picture

its also  Whit Monday or Pentecost Monday

 

The Monday after Pentecost is a holiday in Austria, Belgium, Cyprus, Denmark, France, Germany, Greece, Gibraltar, Hungary, Iceland, Luxembourg, the Netherlands, Norway, Romania, and Switzerland.

Wed, 05/23/2012 - 14:50 | 2456064 bdc63
bdc63's picture

well now, that does make things interesting. 

but I really find it hard to believe that they could get their ducks in a row this quickly

Wed, 05/23/2012 - 14:59 | 2456088 Biosci
Biosci's picture

This quickly?  They will have been planning it for weeks, if not months.

Wed, 05/23/2012 - 18:02 | 2456797 boogerbently
boogerbently's picture

Greece's TOTAL sovereign debt is about $360 billion.

That's laughable. Pay it off, kick them out.

Badda Bing. No contagion

Germany has that much in their sofa cushion !

Wed, 05/23/2012 - 14:45 | 2456048 Waffen
Waffen's picture

interesting.

it looks like May 28th is a holliday in Europe as well as the US.

Wed, 05/23/2012 - 15:13 | 2456146 stocktivity
stocktivity's picture

Wow...we may close positive. it must be all about Facebook rallying.

Wed, 05/23/2012 - 15:29 | 2456213 stocktivity
stocktivity's picture

It's only a 3 day weekend here I believe

Wed, 05/23/2012 - 14:37 | 2456016 fourchan
fourchan's picture

deposit flight is a vote against the tyranny of central bankers. and completely justified.

Wed, 05/23/2012 - 15:02 | 2456103 Max Fischer
Max Fischer's picture

 

 

Notice how the flight to safety was NOT into gold?  Gold is ~$400 off its highs.  

Notice how yields in the US treasury market hit ANOTHER world record low this morning?

So let me get this straight.... as confidence in the world's second most liquid currency continues to deteriorate, gold is NOT the safe haven of choice?  This is the EXACT OPPOSITE of everything the pm carnival barkers have been preaching to everyone ad nauseam.

MF

Wed, 05/23/2012 - 15:11 | 2456138 Uber Vandal
Uber Vandal's picture

If a Bond has a 0.00% return, inflation is running at 2%, that would be a -2% return.

Using the rule of thumb of 72, 72/2 = 36. Thus, your money is losing half its value / buying power in 36 years, exclusive of taxes, or what the actual (unmassaged) inflation rate may be.

Gold is still worth a bit more than $20/Oz. than it was in 1913. A dollar does not quite have the buying power that it did then.

What was your point again?

UV

Civic Honda

Wed, 05/23/2012 - 15:37 | 2456234 Max Fischer
Max Fischer's picture

 

 

No one who buys a short term t-bill at 0% is looking for a return that outruns inflation over 36 years. It's just a temporary place to park cash (safely) until you find a suitable investment. 

In other words, your comparison of a t-bill yielding 0% to the annual inflation rate over 36 years is a senseless strawman.

Also, no one is arguing whether or not cash or gold was a better investment from 1913 to today....  absolutely no one. 

The question is: in times of extreme financial stress with deposit runs and a possible collapse of the world's second most liquid currency, is gold or the US $ a better investment.  The charts are clear: the US dollar.

So....  what's YOUR point?

MF

Wed, 05/23/2012 - 15:52 | 2456320 fonzannoon
fonzannoon's picture

you are not too far off. If the US is the last domino to fall then cash probably is a great place to be as long as you time it perfectly and get into gold before that domino falls.

Sat, 05/26/2012 - 10:01 | 2465091 MeelionDollerBogus
MeelionDollerBogus's picture

t-bills can be revoked. Any gov bond can go to zero instantly. Cash is less likely to do so held in hand. Silver & gold can not ever go to zero and have not in all history.

Wed, 05/23/2012 - 15:20 | 2456182 Jean
Jean's picture

Why would a localized bank run push pm's?  Any pm's in Greece are already buried in urns.  Anyone getting out of Greek banks wants to do so in a way that puts something tangible in their hands, hoping FedEx is still open to deliver your buy or that some customs guy along the line gets a hold au order doesn't seem wise.

Wed, 05/23/2012 - 15:51 | 2456318 piceridu
piceridu's picture

Average price of gold 1971 : 40.62

Average price 2011:  1,571.52

How much value has the dollar lost since 1971

Fucking moron!

 

Wed, 05/23/2012 - 16:00 | 2456355 Max Fischer
Max Fischer's picture

 

 

No one is arguing whether gold or cash performed better since 1971.

Why would you make such an obvious and dumb point?

MF

Wed, 05/23/2012 - 18:47 | 2456934 UP Forester
UP Forester's picture

What's gold doing in Euros, and why do Swiss banks have problems coming up with physical for delivery, per Egon von Greyerz, Max?

Wed, 05/23/2012 - 14:38 | 2456021 Madcow
Madcow's picture

It took 10 YEARS to plan the Euro.  

It was not designed for a global deflationary collapse. 

Now, its time for a "Plan B" - which will take AT LEAST 5 years.

The markets do not have 5 weeks, let alone years. 

 

Wed, 05/23/2012 - 14:41 | 2456032 Dr. Engali
Dr. Engali's picture

Skynet is growing in strength every day.

 

http://washington.cbslocal.com/2012/05/23/groups-concerned-over-arming-of-domestic-drones/

 

Some pimply faced kid playing no blood, no remorse, video war games is being prepped to be tomorrow's  aerial video killers.

Wed, 05/23/2012 - 14:47 | 2456056 NotApplicable
NotApplicable's picture

I've read that book. It doesn't end well.

Wed, 05/23/2012 - 15:04 | 2456110 carbonmutant
carbonmutant's picture

Ender's Game...

Wed, 05/23/2012 - 15:10 | 2456132 iDealMeat
iDealMeat's picture

+1,  Que  Speaker FTD

Wed, 05/23/2012 - 14:44 | 2456041 midgetrannyporn
midgetrannyporn's picture

There's somethin' wrong with the squid today. I don't know what it is...

Wed, 05/23/2012 - 17:26 | 2456680 PersonalRespons...
PersonalResponsibility's picture

It's all good. DOW closed down 6.66.  Nothing to see here.  Move along.

Wed, 05/23/2012 - 14:46 | 2456052 youngman
youngman's picture

This would be a good IPHONE APP....The ATM has cash app....it could tell you whcih ATM´s have cash and how long the lines are...connect this with a Google street view...and an Angry Birds game to play while you are waiting in line...a guaranteed money maker

Wed, 05/23/2012 - 14:49 | 2456053 Mercury
Mercury's picture

But, as Goldman Sachs notes in its Focus today, the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities.  Politically, it will not be domestically popular in Germany (inter alia) to extend such guarantees, however much Germany may benefit from arresting the financial instability deposit runs may cause.

This has been one big fat white swan for over a year now.  I don't no how many times I've mentioned something along the lines of: get out while you can every time Bruce Krasting et al gave an update on Greece. Certainly nothing you read elsewhere on ZH gave you encouragement to think otherwise.

What's next - The Swiss rediscover the appeal of gold,  solid currency and confidential banking?

 

Wed, 05/23/2012 - 14:47 | 2456055 fonzannoon
fonzannoon's picture

Look at this market turn back around. This is Bernanke at his finest. Crush the commodities and keep the market levitated. Give that man a beer.

Wed, 05/23/2012 - 14:53 | 2456075 Conman
Conman's picture

You mean is not normal for market to move upwards on nothing? PPT u r my hero!

Wed, 05/23/2012 - 15:00 | 2456094 junkyardjack
junkyardjack's picture

Efficient market, bitchez

Wed, 05/23/2012 - 15:06 | 2456117 carbonmutant
carbonmutant's picture

Never underestimate the power of Hot Air...

Wed, 05/23/2012 - 14:53 | 2456070 LouisDega
LouisDega's picture

DEl

Wed, 05/23/2012 - 15:00 | 2456098 Byte Me
Byte Me's picture

such a scheme will need to be developed over a longer period.

Print more TIME!!!

Wed, 05/23/2012 - 15:03 | 2456105 Manthong
Manthong's picture

“requires a pan-Euro area guarantee”

Since when have European formal agreements been a barrier of any kind?

 

Secret Central Bank Aid Props Up Greek Banks
http://www.cnbc.com/id/47513542

Wed, 05/23/2012 - 15:06 | 2456099 falak pema
falak pema's picture

Ah, at last the chickens are now ostensibly coming home to roost; and electronic money is NOT fiat money; oh, the subtle nuance. Trillions of derivative mountain in "electronic money"; OTC opaque games amongst uber-alles banks to fleece the sheeple, now become a millstone around their own necks. Give a thief enuff rope and he hangs himself. And even the political shillls can't hide the shit under the carpet. Oh, the pain, the pain the pain; of having to be naked as David sculptured by the financial Michael-Angelos  of pseudo Reaganomics fame, now having to support the blame and the shame. Now that the whole façade crumbles of Sixtine chapel. This is no Michael Angelo to defy the ages, this is a scumbag banksta that sells indulgences. Pope and shill, on the ant hill of the Capitol like in the Vatican. The universal church of greenback is now in dying throes and its no time to ask the vital question. Where have you left the nations who believed in your God of free markets, you swindling swines all dressed in red of the new Curia of the new capitalist age? You will incur the Furia of the battalions of people of new renaissance. Erasmus and sons never die. Stupid ass holes of uber alles, you belong to the dustbin of the Atreus strain. Not that it solves the existential problem. But to each age its own demons; we have to clean out the Augean stables of financialised world.

Wed, 05/23/2012 - 15:24 | 2456198 earleflorida
earleflorida's picture

Fabulous!!!

;))

Wed, 05/23/2012 - 15:37 | 2456252 blunderdog
blunderdog's picture

They buried him in Basel, you realize.

Wed, 05/23/2012 - 15:56 | 2456339 Jake88
Jake88's picture

good luck with that

Wed, 05/23/2012 - 15:09 | 2456126 carbonmutant
carbonmutant's picture

In America we have Bank of Sealy, in Greece you have Coco Mat....

Wed, 05/23/2012 - 15:20 | 2456183 Byte Me
Byte Me's picture

How much further can deposit flight go?

The simplistic answer to that one is "about 890 bil Euros"

http://en.wikipedia.org/wiki/Euro_banknotes  until the ECB effectively runs out and all the notes are under matresses.

Clearly, that's a lot less foldable than the total deposits of the Eurozone's client creditors, so even a minor amount of contagion could have a noticeable impact upon actual notes in circulation thereby slowing velocity and providing another drag on the Eurozone economy.

If a panic were to get established (and let's face it -- our Euroleaders are ball-less) then the ECB would have to mandate the subsidiary CBs to issue more. But that becomes even messier later on.

Wed, 05/23/2012 - 15:21 | 2456184 ebworthen
ebworthen's picture

Now why don't those people trust the banks or politicians?

Think...think...think...

Wed, 05/23/2012 - 15:48 | 2456301 Jean
Jean's picture

Question for the hive mind here -- why would going to a new drachma be the only option for Greece other then staying in the Euro?  What if they devalued to another currency, while providing that currency's outstanding debt protected status while putting the Euro debt in a pigeonhole to be paid later, the candidiate being Russia.

Wed, 05/23/2012 - 15:57 | 2456342 ebworthen
ebworthen's picture

The authority to print and mint currency from another nation is not there.

Also, money is personal, it has an identity that the people have to accept.

Swallowing the Euro was hard enough, I doubt the Greek people would accept being paid in Russian currency; and the Greek government could not set it's value either.

Wed, 05/23/2012 - 19:51 | 2457099 dugorama
dugorama's picture

I like this outside-the-box thinking.  Why not, indeed?  I suppose the Turkish Lira is out of the question?

 

Wed, 05/23/2012 - 15:55 | 2456333 AldoHux_IV
AldoHux_IV's picture

Depositors insurance isn't really bullish for the current financial system as it merely points to the lack in trust and confidence within the banking system and despereate need for alternatives to meet depositor demands.

More importantly this only points to reactionary measures the idiots in the EU are considering in order to address the crisis of solvency (again not liquidity). Where this road leads to will be more strains on the system.

Give the depositors their money but the value of that money will be key, but nothing gets sovled until policymakers and their banker cronies are removed from the policy process.

Wed, 05/23/2012 - 16:52 | 2456549 slewie the pi-rat
slewie the pi-rat's picture

That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities. However, attractive in principle, even Goldman agrees with our skeptical perspective that it is unlikely that such a guarantee can be implemented credibly in short order.

ergo (and correctly, imo) [alsoPaste}

ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination.

and, it doesn't matter at this level;  mismanagement, chicanery, and hankyPanky stop here in the EU polity and that's ok, i think, simply b/c it is real

now, people hafta deal with it

i'm not quite as pessimistic about a greek goobermint getting formed as some here;  i think gPap and his college roomie will lead their parties to form up w/ syriZZZa to govern, BUT they don't know wtf to doodoo until angela tips her hand [thumb up or thumb down?] on keeping greece in the EU and "financed"

so, this is gonna hafta be worked out with antonioSam (newDem) and gPap (pasok) and angela, imo;  i know!  evangelosV is in charge of pasok, but it's gPaps's party (his daddy made it up), and he's on vacation

it's angela's move:  in, out, inside-out, the greeks can handle anything, here, imo, and the voters are screaming for resolution, but it's angela's move and the real greek playas won't even shave till after she's done with her next vomitage of bullshit and bankstering

whether gPap takes the reins again or not?  not even of pasok, here, imo.  since the V-man is his finance guy, anyhow, i look for his old roomie, antonioSam, to step in here, and govern, next

same thing i said last year, when gPap said:  are you shitting me? and resigned...

so he bailed out?  nope, he stepped aside for a trusted goldmanite to step in for the "default"?  well, actually, the trusted squid pushed him outa the plane, but it had stalled and he did have a chute...  so he resigned on the way down!

imo, greece's goobermint will form in reaction/response to angela's thumb.  poor angela, BiCheZ!  L0L!!!  what will the squididity ask of her, next? 

Wed, 05/23/2012 - 17:33 | 2456702 Arnold Ziffel
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