What Happens If Greek Payments Stop: Goldman's Thought Experiment On "The Day After"

Tyler Durden's picture

Because it is one thing to predict the inevitable when one doesn't have a PhD in Economics, it is something totally different when it comes from the likes of Goldman Sachs (Huw Pill and Themistokis Fiotakis to be precise). In this case, that something is what happens at T+1, T being the inevitable (there's that word again) point where payments from the ECB to sustain the zombified Greek patient, all of which go to ECB funded entities anyway, stop. The biggest concern is that, as we suggested first thing this morning, the ECB is now engaged in a fatal game of chicken, whereby it is forcing Greeks to vote "Pro Bailout" (something that just dawned on the FT), in exchange for continued funding, because unlike last year when the threat of a referendum resulted in the termination of G-Pap, now there is no leader who can be sacrificed, and Europe has no real leverage over the people who have lost so much already, aside from threatening a full out bank system collapse. However, this could very well backfire as more and more Greeks pull their money out, not wanting to find out who blinks first as it would be their money that could be locked up in perpetuity, in essence making the ECB threat into a self-fulfilling prophecy. And as Goldman says, "If confidence is lost and a run on banks occurs, the implications are hard to assess." Well, as ZH warned yesterday, this is already starting. Again from the FT: "Athens-based bankers said withdrawals exceeded €1.2bn on Monday and Tuesday – 0.75 per cent of deposits – as President Karolos Papoulias failed in two final meetings with conservative, socialist and leftwing leaders to form a national unity government." Or double what was suggested yesterday...

From Goldman Sachs

A Stop In Greek Payments – ECB Reaction is Key

As mentioned earlier, the Greek adjustment programme is likely to soon come to a premature end, given the highly unstable political situation in Greece. With payments from the troika suspended as a result, Greece will neither be able to finance its primary deficit nor meet its debt servicing obligations.

This “stop” in payments would precipitate an immediate fall in economic activity, given the need to abruptly close the primary fiscal deficit (worth about 2.3% of GDP in 2011). As government arrears (worth about 3.5% of GDP) fail to get paid, supplies to public sector companies (e.g., power, water supply) and hospitals would be disrupted and their output and activities curtailed. In this context, the inflexibility of Greek wages will result in higher unemployment, while product market rigidities are likely to imply sticky inflation (or even price increases).

The state of the banking system in such a difficult environment will determine whether Greece experiences a sharp and painful recession or suffers a much deeper and more traumatic economic collapse.

A functioning banking system would: (1) preserve the flow of credit to corporations; (2) allow access to deposits for households to smooth their income shortfall; (3) ensure continued operation of the payments system; and (4) accommodate some marginal access to trade finance for exporters; while (5) importers would still be able to supply the economy with basic goods such as energy, oil and food. All these elements will likely contain the damage to the economy.

ECB Issues To Be Addressed The Day After Payments Stop

Whether the banking system remains functional will largely depend on the ECB’s reaction to any troika decision to stop payments to Greece.

There is no automatic relationship that could force the ECB to stop the flow of liquidity to Greek banks at that point. Rather, the ECB will have to take a set of key decisions:

  • Greek bonds owned by the ECB, worth around EUR 50bn, will need to be serviced. However, given that the troika makes Greek debt servicing payments via the established escrow account, this does not directly affect the relationship between Greek banks and the ECB. Such servicing payments entail nothing more than an internal transfer of funds within the official sector (i.e., from the troika to the ECB);
  • Collateral requirements for Greek banks. Once the newly restructured Greek sovereign bonds enter default, they would no longer be eligible collateral for use in the ECB’s monetary policy operations that provide the bulk of liquidity to Greek banks. Assuming that the ECB does not immediately call the repos it had previously extended to Greek banks – something that would immediately precipitate the collapse of the Greek banking system – this liquidity provision could be shifted to emergency liquidity assistance (ELA) provided through the Bank of Greece (where a much broader range of collateral is deemed acceptable). Although the ECB imposes limits on how much Greek banks can draw from the ELA facility (and collateral subject to haircuts is still required), there is still room for Greek banks to use ELA, as happened during the PSI;
  • Bank capital. Recapitalization of Greek banks has not been finalized and the insolvency of the new bonds would create additional capital shortfalls. Without recapitalization, Greek banks will be insolvent. Providing liquidity to insolvent banks is not within the ECB’s mandate. That said, the current temporary provision of liquidity under the guarantee of the Hellenic Financial Stability Fund (to local banks) can be extended until there is a Euro area decision on the backing of the fund with resources; and
  • A potential run on banks. If confidence is lost and a run on banks occurs, the implications are hard to assess. It implies an urgent and significant increase in liquidity needs for Greek banks and the commitment of additional resources by the ECB (at the extreme, even a relaxation of collateral rules).

In the end, the ECB is unlikely to accept final political responsibility for excluding Greece from the Euro area and/or precipitating a Greek financial collapse. It will therefore have to make decisions across these dimensions in conjunction with the governments of core Euro area countries, who would then decide Greece’s fate in that regard.

Big Picture Remarks

The discussion above is meant to show that there are no automatic and instantenous triggers of a systemic banking system collapse (perhaps barring a run on banks) linked to an interruption of Greek payments by the troika. The ECB has the facilities to sustain Greece even in that eventuality, should it be willing to bend its rules and even perhaps commit more funds to protect Greek banks from a liquidity-driven default.

The ECB’s decision as to whether to behave in this way will be guided by Euro area policymakers’ assessment of whether a standstill in Greek payments should trigger a full separation of Greece from the Euro area.

To a large extent, therefore, the decision will depend on whether there is a Greek government in place and on the stance of such a government. A unilateral repudiation of financing agreements from Greece’s side would likely provoke equally aggressive responses from its Euro area counterparties. In contrast, it is not clear what the course of action will be should Greece remain without a stable government for an extended period of time.

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nope-1004's picture

Can't wait for the payments to stop.  End this charade already.


markmotive's picture

Youth unemployment in Greece is over 50%! What happens when they exit? Doesn't get better, that's for sure.

Greece is a powder keg about to blow.

Why do you think Greeks are withdrawing Euros like there's no tomorrow? Because there is no tomorrow!


engineertheeconomy's picture

You have it backwards.

Their being In the Euro is what caused their high unemployment.

How can you create jobs when the Bankers stole all the money?


sessinpo's picture

I would suggest that the international bankers are nothing more then loan sharks that have bought up local politicians. But if you don't take the loans, well then you don't have to deal with the loan sharks. The Greek population had no problem voting in and taking the money. Now that payment came due, well, the sentiment has changed to we were bamboozled. A population that takes no responsibility is a population asking for slavery and misery.

LawsofPhysics's picture

Precisely why everyone else should stop wasting capital and resources and let the greeks deal with it.  If you think these people are not responsible, then don't do fucking business with them and STFU.  Free markets after all, right?

sessinpo's picture

You got that right. Nice to meet a like minded individual on ZH. The leftist hate us. LOL

Fish Gone Bad's picture

Things have just gone from "Fucked up" to interesting.  Time for popcorn.

salvadordaly's picture

Read the post above, "POOF" your wish has been granted!

engineertheeconomy's picture

No problem. Greeks can all just use their own paper to use as currency. They have plenty of it. Its called toilet paper. Hell, why waste time and effort with ink. They can just use a crayon and write any number they want on them. It will have the same value as the Euro. Or the Yen, or the Dollar or whatever useless currency made out of paper you want. Even a baby knows that a piece of paper is only a piece of paper.

Better yet, why don't the Greek people just enter a bunch of zero's on their keyboards like the Central Bankers Do?


engineertheeconomy's picture

Alot of drama over some unpayable usury. As if they didn't plan this all along. Everything is going exactly as planned.

Got Precious Metals?

fonzannoon's picture

so I guess it is a big deal if Greece goes after all.

HarryM's picture

As long as Greece is on the brink there will be no new LTRO or QE no matter how bad stocks tank.

If they do QE and then Greece collapses a week or two later , they will be out of ammo and the market will go down hard.

sessinpo's picture

HarryM                 2432689

As long as Greece is on the brink there will be no new LTRO or QE no matter how bad stocks tank.

If they do QE and then Greece collapses a week or two later , they will be out of ammo and the market will go down hard.



I disagree with the above statement. Here is my reason. It was well known that Greece would eventually collapse by TPTB. It is currently known by the TPTB that the Euro (monetary union) will also collapse. The rediscussion of the ISDA to review its policy on whether default has occurred was no coincidence. It was the insurance in case Greece did not default. The prevailing wisdom was that the ISDA was protecting member banks and thus not declaring default when in fact Greece defaulted a long time ago. The real purpose was to set up a euro decline so that the dollar would be stronger relative to that. That would then allow for further QE with less impact on the dollar. Ultimately, it all fails.

HarryM's picture

Short term  - It's all about perception, they need a controlled Greek collapse .

Only if Greece is under control ( One way or the other) can they print.

They have to save that ace in case they lose control.

Greece is a dog that needs to be put to sleep carefully and in a way that demonstrates control or the EEC will be history in 12-18 months, and possibly the world shortly thereafter.

This is not some run of the mill recession where we play currency tiddlywinks - this is the potential Global Killer, end-of-fiat game and quite frankly it scares the shit out of me. 

Sure a Euro decline would be nice, but I believe printing these days is heavily coordinated, not just a solo effort, one falls, they all fall, no one wins a nuclear war.


DonutBoy's picture

Greece is the live-fire exercise, Spain is the war.

Joe Davola's picture

Funny, Spain was the warm-up for the last World War.

Olympia's picture

Global Debt Crisis

The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?

By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...


LawsofPhysics's picture

Financial terrorists still think they can suspend gravity.  Bullshit, the sun will still rise and the greeks will be free to deal with their own mess.

buzzsaw99's picture

Great system for extortion, the squid loves it too. Eliminate the gangster central banks and all these bank runs would stop too. Criminal gestapo bankers.

JLee2027's picture

.75 percent - that's all??? So 160 billion still left in deposits?  I feel sorry for the people who still trust the banks in Greece (or anywhere).  This thing has a chance to mushroom and become global quickly.

engineertheeconomy's picture

The sooner it collapses the better. We need to get these criminal Bankerpoliticians out of government world wide now.




JLee2027's picture

I agree. Might prefer silver coins - they can be used as a temporary currency if this all becomes unglued.

Waffen's picture

these were my thoughts as well, until I realized that 99% of the depostits are probably corporate pensions, government funds, money tied in business etc.


a greek citizen must be a complete moron to still keep his own savings in a bank.

bnbdnb's picture

Thats "deposits", not cash.

John_Coltrane's picture

You got to mulitply that .75% by the bank fractional reserve leverage which is probably around 20:1 as for most EU banks.  So, they've lost 20*.75% = 15% of their real reserves in a few days.  Ain't leverage great?  (So, long as its working your way as many home debtors found to their chagrin)

youngman's picture

Is there going to be anymore lightning hitting anymore planes today..if not I am going to the bar...no more meetings..rumors..QE´s..its getting boring...we need a rod to melt in Japan or something...Gold is whacko today...the computers are fighting it out...

loftgroovv's picture

Nothing will happen... there is ALWAYS  way to kick the debt can down the road so it seems.


Every few months for the last three years we've had "the end of the road has finally arrived", and there is always some deal done whereby creditors accept a writedown, or the IMF or central banks intervene, and the whole thing trickles on.



Waffen's picture

my nightmare it this going on for in perpetuity, while we all go broke and end up eating our pets waiting for the silver and gold moonshot

DonutBoy's picture

I think it's like the housing bubble.  I told my ex-wife it had to end in 2005, we should sell our house.  She told me I was an idiot.  She was right - we got 33% more by the time we sold in 2010, but it was a bubble and it is crashing slowly.

When fiat currency crashes - and it will, I don't think there'll be any cover.  Who can print money to prop up financial assets denominated in the dollar, euro and yen simultaneously?  It might be 5 years from now, but I believe it will go with a bang.  I'm a subscriber to the Hendry theory - we will get rip-roaring inflation, but only after a deflationary crash of biblical proportions when all of these financial 'assets' get marked to reality.


q99x2's picture

Cashin says it is not how long the lines are at the Athens ATM it is whether or not fist fights are taking place to see who can get their money out first.

The banksters will call NATO forces in to stabilize (make sure the Greeks pay everything including their future). Probably along with a few Rusky troops like they intend to do here.

brettd's picture

No money for gas?

Then no more fuel payments for the local gas station.

devolution follows quickly.

navy62802's picture

I wonder if a run on the banks in Greece would spark other runs in other European countries like Spain or Portugal or even Italy for that matter.

engineertheeconomy's picture

or even the United States for that matter.

fixed it for you

navy62802's picture

We are always one widespread bank run away from total chaos.

Gief Gold Plox's picture

Why sure. I for one have been running to and fro the bank on a regular basis as it's much better getting gold and silver for cash anonymously.

Though maybe it's not really a run, more like a two legged limpy stumble-fest. :P

Catullus's picture

You've got to figure if they're holding a 5% reserve ratio. If .75% of all deposits are taken out, you're now levered 23:1. 4.28% reserve ratio now. You basically go completely broke at this rate in 12 more days at this rate.

There's nothing really an agreement is going to do at this point except pause the withdrawls.

Nozza's picture

...which takes us to Monday 28 May, Whit Monday, A public holiday in Germany and most of Western Europe.

BidnessMan's picture

And also Memorial Day holiday in the US

John_Coltrane's picture

Correct.  Only 5% of the depositors can get 100% of their deposits or 100% of the depositors can get 5% out.  Its the same in the US which is why you should always have lots of cash (months to 1 year of living expenses) on hand no matter where you live in the world.

RoadKill's picture

Did some math that I thought you giys might want to see

GREEK Bank Deposit Flight
Jan 2007-Jan 2011 ~€60bbn=€40mm per day
Jan 2011-jan 2012 ~€40bbn=€100mm per day
Last 2 Days ~€1.2bbn=€600mm per day

SHIT IS GETTING REAL. This is the 1st time since 2009 Ive felt like we are days away from something BIG

ginunn's picture

Just had a thought. The best strategy for Greek citizens right now is take your money out of the bank as euros and stick it in your mattress. This will cause a banking system crisis and the government will have to intervene and nationalize the banks. They may even pursuade the Troika to help fund the liquidity to do this.

The government then defaults, leaves the euro and issues a new drachma that devalues 50% or more against the euro. When it stabilizes, citizens take their euros and buy twicw as many or more drachmas. They avoid the devaluation phase.

mendigo's picture

You be right particularly in that the Greeks need to wake up and plan for what they want and stop letting the rest of Europe and the bankers tell them what they should do. They are half-way over the fence don't hesitate now.