Earlier today we got a classic, if rare, example of what happens when bankers bluff with a 2-7 off suit... and the people call it.
Recall that just over two weeks ago [10], none other than Greek currency swap expert Goldman (alongside Jean-Claude Juncker who quite explicitly warned Greeks not "to vote wrong [11]") came out with a fire and brimstone worst-case scenario for Greece, which was nothing but an attempt at fearmongering designed to scare Greek MPs into doing Samaras' bidding, in which it said not electing the designated presidential candidate may lead to a worst-case scenario which involves a "Cyprus-style prolonged bank holiday."
For those who have forgotten, these were the salient points from Goldman [10]:
In the event that the parliament fails to elect a president, general elections would be held and market uncertainty/pressures would extend. At this stage it is important to understand that market pressures are not linked to the democratic process of elections nor to a potential government change, whatever the ensuing government formation may be. They are linked to the risk of policy discontinuity and a severe clash between Greece and international lenders. More specifically, we think the room for Greece to meaningfully backtrack from the reforms that have already been implemented is very limited. Any such attempt would lead to an interruption of official financing to Greece.
Examining the downside scenario.
To be sure, even in the event of a government change, there is room for a cooperative solution between Greece and Europe. Greece has made significant reform progress between 2012 and the gap between what has already been implemented and what remains to be done is not insurmountable.
Also, the incentives for a clash are not there. For instance any Greek government would likely want to capitalize on the momentum that the economy is building on the activity front, rather than trigger a disruptive capital flight that would lead Greece to a double–dip recession. In addition, given that more than 80% of Greek debt is held by the official sector and given that any OSI would be feasible only as part of an agreement with the Euro-area, there is an incentive for a Greek government to pursue cooperative solutions.
However, the history of the Euro-area crisis has shown that the probability of an “accident” can never be dismissed, when it comes to intra-EMU politics. And it is important for markets to be able to understand and quantify the aspects of a potential downside scenario, where official financing to Greece is interrupted.
The Biggest Risk is an Interruption of the Funding of Greek Banks by The ECB.
Pressing as the government refinancing schedule may look on the surface, it is unlikely to become a real issue as long as the ECB stands behind the Greek banking system. In fact, refinancing became a lot more pressing between 2011 and 2012. But financing needs were met despite the impasse in negotiations between Greece and international lenders – partly via the issuance of T-bills repoable at the ECB by Greek banks. Such methods can always be revisited at times of extreme need.
But herein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And this is not just because banks may require resources to help reduce future refinancing risks for the sovereign. But also because banks are already reliant on government issued or government guaranteed securities to maintain the current levels of liquidity constant.
And this risk can become more pressing from a timing perspective. At the heat of the Greek crisis, there was evident deposit and broader capital flight, which Greek banks helped accommodate with ECB’s help via the ELA facility. In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point.
Stripping all the political correctness, what Goldman said is that unless Greece quickly folds back in line and does as unelected Brussels eurocrats demand, there may well be a Cyprus-style bank closure coupled with preemptied bank runs.
Oops. Because if that was the doubled-down bluff, then Greece just called it, and the "downside scenario" is now in play.
Which means Greece now has to scramble to avoid precisely what Goldman warned would happen if the Greeks dared to put their (meagre) savings at risk. And, case in point, here is the Greek finance minister rushing to squash the next steps, which - as Goldman so conveniently explained - involve potential bank runs, a potential bank holiday, and potential Cyprusing of the financial system, only this time it is not Russian oligarchs who are most exposed - they have learned their lessons by now - by ordinary Greeks.
Here is Newsbomb.gr [12]with what is sure to be an amusing backtracking on all the fearmongering that had been unleashed previously.
The government has guaranteed that bank accounts are safe and legislated deposit safeguards in the event of a shakeup ahead of Monday's parliamentary election for Greek president, Finance Minister Gikas Hardouvelis said in an interview on Sunday's Vima.
Hardouvelis was speaking ahead of the third and last attempt by this Parliament to elect a Greek president that will held on Monday, December 29. Failure to elect one
"We are preparing to withstand any rolling and pitching. We have already passed laws safeguarding bank deposits, and are in constant touch with our EU fellow-members, while the whole government will be on alert and vigilant," Hardouvelis said.
Hardouvelis said that Greece must continue "to the next stage, which will be based on our growth plan, under our own initiative, without coercion by the troika of Greece's lenders."
Speaking of "bank deposits, which are safe," he said his ministry had "taken care this past week and legislated the option of the Hellenic Financial Stability Fund's to lend money to the Hellenic Deposit and Investment Guarantee Fund if it needs greater reserves than those available to support depositors."
Asked whether he thought that a new government might be elected with a stance hostile to the memorandum, the finance minister replied, "The key to avoid tossing and turning and our economy's future in 2015 and later is held by the European Central Bank... This key can easily and abruptly be used to block funding to banks and therefore strangle the Greek economy in no time at all."
Actually no.
The ECB's hands are tied right now, because the last thing Mario Draghi can do is proceed with open monetization of peripheral bonds (which would have to be purchased in any ECB public QE alongside all other Eurozone bonds) at a time when Greece can pull the rug from under the ECB's already massive holdings of Greek public debt, and enforce a haircut which would impair the ECB's balance sheet, in the process costing Mario Draghi his job and a handing the victory to the "sound money" Bundesbank on a silver platter.
Worse, should Greece decide to default it would means those several hundred billion Greek bonds currently held in official accounts would go from par to worthless overnight, leading to massive unaccounted for impairments on Europe's pristine balance sheets, which also confirms that Greece once again has all the negotiating leverage.
So with the ECB out of the picture, and with the ball in Greece's court, it actually makes the situation that much more unstable, and indeed could be just the precursor to the "Cyprus-style bank holiday" that Goldman warned about.
How credible will this warning be in practical terms over the next month as Greece prepares for a historic election? Keep an eye on those lines in front of ATMs, because unlike Cyprus, at least the Greeks still have access to Euros. The question is will they pull out enough Euros before their only currency option in front of the ATM is New Drachmas?
