JPM On Grexit, TARGET2, And The ECB

Tyler Durden's picture


Unless Greece chooses to leave the Euro area, which JPMorgan doubts will happen, the rest of the region will have to push Greece out. The mechanism for this will be the ECB excluding the Greek central bank from Target2, the regional payments and settlement system. Although this might look like a technical decision about monetary plumbing, the ECB will elevate this to Euro area Heads of State. 

There is understandably a lot of interest in the mechanics of how a possible Greek exit from the Euro would play out in relation to the ECB. Reports of significant deposit withdrawal from Greek banks also direct attention toward the support for Greek banks coming from the Greek Central Bank and the Eurosystem. And yesterday’s announcement by the ECB of restricted access to regular repo Eurosystem financing for a number of Greek banks adds some more complication. Though we would not place a lot of emphasis on what the ECB announced yesterday as a signal of broader attitudes toward Greece, understanding the mechanics matters more broadly.


The view from the asset side…


Let’s start by considering the asset side of the Greek Central Bank’s Balance sheet (This is the less interesting part of the story, in our view).


If the Greek central bank makes loans to Greek banks under standard ECB repo terms, the credit risk on such loans is (under current law) shared across the Eurosystem. Regular repo operations against “extended collateral” see the credit risk transferred to the Greek central bank. And if the Greek central bank makes loans under ELA, the credit risk stays with the Greek central bank.


In the event that Greece were to leave the Euro area, any possible losses on ELA loans to banks and repos against extended collateral accrue to the Greek central bank.  What would happen to any losses on regular repo operations in the context of euro exit is much more hazy. Greece may claim legal  grounds that any losses should be shared. But since EMU exit would be a material breach of existing legal treaties, it is tough to argue that existing legal provisions would necessarily carry much weight. There would probably have to be some negotiation over any losses that accrue down the line.


The ECB’s decision yesterday to limit the access of Greek banks to regular repo financing, forcing more use of ELA, reflects the fact that the banks and the Greek authorities are still haggling over the terms on which they are recapitalised. The ECB’s position is that until the capital goes in, the banks are not fully solvent, hence lending to them goes via ELA, not regular repos. On the one hand, this puts pressure on the Greeks to stop haggling on the recap terms. On the other hand, some may argue that it demonstrates that the ECB is keen to limit the system’s exposure to Greece as a whole, pushing the loans to ELA where necessary, where Greece has no legal comeback at all for losses. We think the first of these is more important.


The view from the liability side….


If we now think about the liability side of the Greek central bank balance sheet: the story gets more interesting. The Greek central bank creates euros when it grants loans to Greek banks via either repos or ELA. In the first instance, these show up as reserve holdings by the Greek banks at the central bank when the euros are credited to their account. But with euros leaving the Greek banking system, Greek banks lose reserves as transactions are settled through the payments system. As Greek bank’s reserves  fall, this is replaced by a liability to the Target2 payments system for the Greek central bank. The Greek central bank’s liability to the rest of the Eurosystem via Target2 is currently near €130bn. As we move toward the Greek election next month, that is likely to climb given deposit flight. But we expect the ECB will do all within its power to keep the Greek banking system afloat until the election, even if some of the loans to Greek banks are redirected via ELA. The terms of ELA can be stretched so that Greek banks do not run out of collateral, while banks can issue bonds to themselves backed by a government guarantee to create more collateral.


How Greece could get cut off from Target2


But a much more challenging question is what happens after the election. Let’s imagine Syriza is able to form a government, declares a debt moratorium, and antagonizes the rest of the region by rejecting the Troika programme in its entirety. Even with no further disbursements of official loans, the region’s loans to Greece via the target 2 system will be continuing to grow. Loans from the Greek central bank to Greek banks would be almost completely forced into ELA.

The ECB can “shut off” the Target2 loans if it exercises its veto over ELA loans (requiring a two-thirds majority on the Governing Council), and if the Greek central bank respects that veto. But the Greek central bank would likely be faced with the need to impose very restrictive controls on Euro deposits to limit outflows if ELA loans to Greek banks cannot be made. If the Greek central bank is faced with the prospect of imposing capital controls, a collapse of the Greek banking system, or defying the ECB’s veto on ELA loans, what route would it take? If it chose the latter, the only way for the ECB to “shut off” the Target2 loans would be to prevent Greek access to the payments system itself, refusing to accept payments of euros to and from Greek banks. At that point, Greek created euros are no longer euros. That decision would not be made by the ECB alone, but would likely be deferred to European Heads of State.

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Fri, 05/18/2012 - 15:51 | 2441561 Olympia
Olympia's picture

The end of the world is near... The ten plagues of Pharaoh “have been brought upon” the USA.

From the Wall Street Crash of 1929 to the Global Financial Crisis of 2007


It is the absolute tragedy for the USA. The former illegal immigrants had become the masters of their land; the ultimate masters. The people who wanted to collaborate with the Jews to become “Pharaohs” had the same bad luck. The greedy “locust” of the Asiatic desert swapped the USA and left absolutely nothing standing. The formerly rich people of the New World have been drained of their money to such a degree that they have passed the point of poverty and are headed towards starvation. The Americans now experience desperation and trust in God. Poor and hungry people gather around the fire to warm and cast their eyes up to heaven as their last hope. These are the former planet leaders...

Authored by Panagiotis Traianou

Fri, 05/18/2012 - 16:14 | 2441682 Silver Bug
Silver Bug's picture

Greece and Facebook both Fail.

Fri, 05/18/2012 - 16:26 | 2441728 stiler
stiler's picture

I would say you are in a good place looking up and trusting God.

But in your analogy, if the Jews were responsible for the 10 plagues of Egypt, then they are in place of God, when actually they were slaves. So you give them too much power. The people in Egypt before and during Joseph's arrival there were the Hiksos, a tribe friendly to Joseph and his family (Jacob and the 12 tribes) and Semitic also. 400 yrs later, the first Hametic king arose, Akmos (Exodus1:8) who did evil to Israel. Then in 2:5, Akmos' granddaughter, Hutshepsut found Moses by the river Nile. (also in Acts 7:20) You've got it twisted-- operation twist of the Bible. Israel is the people of God and God is good (and severe). He is able to punish His people and to revive them again. Shall these bones live? Yes, but the gentile nations will be blaming Israel right up to Harmageddon and will be severely punished for it.

Fri, 05/18/2012 - 15:54 | 2441576 stormsailor
stormsailor's picture

the girl in the "i used to care" t-shirt must have a pill for "enhancement" as well.


greece will go down this weekend.

Fri, 05/18/2012 - 15:56 | 2441582 Cognitive Dissonance
Cognitive Dissonance's picture

Check.......and least for this level of the game.


Remember, it is desperate faith that holds the spinning wheel together, not any one bolt or steel cable. One can never tell when faith will be lost, only that when it goes it will be sudden and devastating for all involved.....including you and me. The splatter will cover the entire world.

Fri, 05/18/2012 - 16:01 | 2441610 carbonmutant
carbonmutant's picture

You mean like an incoming asteroid?

Fri, 05/18/2012 - 16:04 | 2441637 Cognitive Dissonance
Cognitive Dissonance's picture

Yeah. Something like that.

Fri, 05/18/2012 - 16:13 | 2441674 carbonmutant
carbonmutant's picture

Wow, that was graphic...

Sat, 05/19/2012 - 12:31 | 2443313 andrewp111
andrewp111's picture

That was more than an ordinary asteroid. More like a small moon.

Fri, 05/18/2012 - 20:09 | 2442404 boogerbently
boogerbently's picture

I think we'll be OK here in Idaho   :)

Fri, 05/18/2012 - 15:56 | 2441585 malikai
malikai's picture

I am just dying to see the NANEX charts of the action in FB today. This is a work of art.

Fri, 05/18/2012 - 16:13 | 2441679 i_call_you_my_base
i_call_you_my_base's picture

That fifteen minutes between 330 and 345 where it stayed at $38.00 was hilarious. I just watched it the whole time in awe.

Sat, 05/19/2012 - 03:30 | 2442891 NoClueSneaker
NoClueSneaker's picture


USS "FacialBookFraud" on WARP 9 .  NANEX near the wormhole ....

Fri, 05/18/2012 - 15:57 | 2441590 Confundido
Confundido's picture

Guys, think about this: Today's with the USD Libor- OIS/ Eur Libor - OIS/ EurUSD basis at the levels they are, it makes no sense to pull a QE3 or a LTRO3 or even another USDEUR Swap. None. The market is awash in liquidity. So....if the Euro zone breaks will America survive with a devalued Euro? How will America further devalue its ccy? The answer issssssss.......................................The Fed could announce a ped of the USD to the Euro. That way, you open the door to QE by the FED on the Eurozone and avoid, simultaenously, a devaluation of the USD!  Think about it!

Fri, 05/18/2012 - 15:57 | 2441591 Rainman
Rainman's picture

The euro was a creation of the devil. Behold his evil handywork.

Fri, 05/18/2012 - 20:16 | 2442423 boogerbently
boogerbently's picture

It's no surprise that a country that believes in fixing debt with more debt, would allow a banking system that bankrupted the world through leveraged irresponsible investing, to continue leveraged irresponsible investing.

We get what we deserve.

They promise us stuff we want, but can't afford, so we continue to vote for them.

Our "checks" have officially surpassed our "ass".

Fri, 05/18/2012 - 15:58 | 2441599 carbonmutant
carbonmutant's picture

Germany denies it asked Greece for Euro referendum


Fri, 05/18/2012 - 16:08 | 2441648 Ahmeexnal
Ahmeexnal's picture

The greeks taped the phone conversation.
This is the end for Merkel. Hope she rots in hell!

Fri, 05/18/2012 - 16:49 | 2441850 dodos26
dodos26's picture

There is a solution for Greek debt

Fri, 05/18/2012 - 17:04 | 2441887 slewie the pi-rat
slewie the pi-rat's picture

fuk theMorgue and the whore they rode in from!

slewie sez: mebbe this is where goliath realizes david has a stone...

...and a sling...

...and nothing to lose...,...and a lotta support...,...and courage...,...and is insane...!...

Fri, 05/18/2012 - 17:03 | 2441903 THE DORK OF CORK
THE DORK OF CORK's picture

Greek car regs Jan - April

Y2008 : 107,266

Y2011:    35,459

Y2012 :   21,588  
Fri, 05/18/2012 - 17:07 | 2441919 slewie the pi-rat
slewie the pi-rat's picture

when greece achieves US statehood, you shall have the schwinn franchise and all the bike rental kiosks at slewieInternationalIarport in athens, too, dorkus!

Fri, 05/18/2012 - 20:19 | 2442432 boogerbently
boogerbently's picture


If you don't need to work, you don't need a car!

The economy is so bad, all forms of robbery increase.

Your honor, I'd like to report my car was stolen.

But it says here, you don't own a car....

Fri, 05/18/2012 - 17:08 | 2441921 CrashisOptimistic
CrashisOptimistic's picture

Heads up.

Latest poll, released by Bloomberg, says New Democracy has retaken the lead for the election.  The seat total projection for them and PASOK was 160+.

This is not good.

Fri, 05/18/2012 - 17:35 | 2441999 Balmyone
Balmyone's picture

I just checked , they do ship to Greece.

The question for everyone is whether this move higher in gold and silver is sustainabile, or just one large head fake.

It seems that as June 17th gets near, fears of Greece getting the boot will push everything lower, save the POS USD and Treasuries.

Fri, 05/18/2012 - 19:15 | 2442261 scrappy
scrappy's picture

Gainesville sure has a lot of gold coins out of stock.

Don't know if you guys are seeing it elseware.

Apmex appears stocked, but premium seems higher.

Harvey Organs Daily Gold and Silver report

Have a nice weekend ZH'ers



Fri, 05/18/2012 - 19:51 | 2442347 Hohum
Hohum's picture

Greece: Out of the Euro zone, into the Gyro zone!

Fri, 05/18/2012 - 22:21 | 2442564 Alexandros
Alexandros's picture

It’s a matter of time before Herzl’s Zionism and the rest of the gang’s, which dreamt of “biting” the whole world, will be “eradicated” from the entire world and will be confined to Israel. That “eradication” will be the confirmation of the Jewish curse. One after the other the nations will abandon the Jews and Zionism will lose one “tooth” after another. The only thing that Zionism will be left with is Israel. But in order for Israel to survive in the future it will have to function as a normal, thus productive nation which means that it will too be unavoidably hostile to the verminous Zionism. The “toothless” Zionism, that is, will have only one “tooth” left and it will hurt like hell and in perpetuity.

Sat, 05/19/2012 - 07:14 | 2442963 The Reich
The Reich's picture

Thank God, JPM has no special interest in Greece.


Shamed be he who thinks evil of it.

Sun, 05/20/2012 - 04:33 | 2444697 nah
nah's picture

under the big tent they would handle something like this by sending in the clowns

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