That didn't take long: just hours after Greece entered the ECB countdown mode, with now just 23 days until midnight on February 28 [10], when the ECB is set to yank the final pillar of liquidity support, the ELA - as it has warned before - it is time to start contemplating Plan B, or rather plan Z. A plan, which as described by Nordea's analyst Jan von Gerich, would be quite unpleasant for that nearly extinct class of Greeks, bank depositors, because the "plan", or rather blueprint, is a well-known one: capital controls.
As Nordea points out, ECB’s decision to restrict Greek bank access to direct liquidity lines risks increasing uncertainty among depositors. As a result depositors may decide to withdraw more money from Greek banks. Most of these outflows would likely be replaced by ELA funding, increasing risks for Eurosystem.
However, if ECB becomes more uncomfortable with situation or Greek banks risk running out of collateral, Greece may need to impose Cyprus-style withdrawal limitations and capital controls.
Gerich notes that while there’s been some progress in talks, Greece needs to back down further for deal to be reached, although as he also observed, the news flow needs to become worse for Greece to drive broader markets to more notable extent.
Why is this important? Because as we have said from day one, what is going on now between Greece and Europe is a game of leverage, leverage which can now be quantified: For the ECB, it is measured by how long the lines are in front of Greek ATMs; for Greece, it is inversely proportional to the level of the Stoxx 50 (and to an extent the S&P500).
And just in case some think that capital controls is a fringe plan, one that will never see broad acceptance, here are the key highlights from Bloomberg's "One Way Greece Can Keep Its Banks Alive [11]."
An outflow of deposits from Greek banks will put pressure on the government to limit how much money people can withdraw or transfer outside the country as European Union nations lose patience with providing a lifeline.
Imposing capital controls, as Cyprus did two years ago when its banks faced a crisis, would buy time for Prime Minister Alexis Tsipras’s government to negotiate debt relief, according to economists including Daniel Gros, director of the Centre for European Policy Studies in Brussels.
“Capital controls may be the only option to stop the bleeding in the banking system,” Gros said in an interview.
Greek banks probably lost about 21 billion euros ($24 billion) of deposits in the past two months, or 11 percent of the total as of the end of November, according to the ECB and estimates last week by JPMorgan Chase & Co.
Depositors are withdrawing money now because they’re worried a refusal by the government to extend the bailout when it expires at the end of the month could lead to an exit from the euro area. That would mean waking up one morning and finding their savings converted to drachma, which would face a steep devaluation. Putting the money in another European bank or keeping it as cash at home would protect them from losses.
... Customers withdrew 6 billion euros in December, central bank data show. They pulled out an additional 11 billion euros in the first three weeks of January, and the total for the month may have reached 15 billion euros, JPMorgan analysts estimated. That would be more than was withdrawn in May 2011, the month with the biggest drop in the earlier crisis.
But bank run aside, what happens if/when D-Day comes and Greece still has no funding options?
If the central bank refuses to extend this type of lending, Greek banks would run out of cash quickly, as they already rely on ECB funding for about 70 billion euros they can’t replace because they have been shut out of capital markets since November.
That would force Greek banks to cut lending to companies, consumers and the government. They’d be unable to roll over treasury bills and might recall loans. Greece would have to abandon the euro and print its own currency to fund its banks.
“Given how extreme this option is, the ECB might instead impose a Cyprus-like solution of withdrawal and capital-transfers controls,” said Nicholas Economides, an economics professor at New York University.
[12]
While only national governments have the power to impose capital controls, and doing so is in violation of the European Union treaty, the ECB gave tacit approval when Cyprus did just that in 2013. The central bank had threatened to cut off all liquidity to Cypriot lenders if the government didn’t reach a deal with its European partners.
What Europe Plan B, or rather Plan Z [13], would look like:
“If the deposit flight is continuing while things drag on, the euro zone wouldn’t want to increase its exposure to Greece through rising ECB financing,” said Ruparel. “Then they’d push for capital controls as a way of limiting further exposure in case things don’t work out and Greece ends up exiting. It’s an option nobody wants, but it will become likelier the longer the type of brinkmanship we’ve seen recently continues.”
Even though they’ve been loosened, capital controls remain in place in Cyprus. While they have been successful at stemming deposit outflows and stabilizing the banking system, the country is stuck in a three-year-long recession.
In the case of Greece, controls probably would only work for a few months as Tsipras’s government negotiates a new debt deal with its European creditors, according to Benn Steil, director of international economics at the Council on Foreign Relations in New York. Without an agreement, restrictions on withdrawals wouldn’t be enough to keep Greece in the euro zone.
“The Grexit could happen slowly, not in a big bang as we always imagine,” Steil said. “It could come after capital controls and other ways of scrambling to continue.”
The sad conclusion, if only for innocent Greek bystanders in this epic middle-class plunder designed to make trillionaires out of billionaires:
“The experience of Cyprus suggests that you cannot completely rule out capital controls any more as a policy option,” said Jens Bastian, a former member of the European Commission’s Greek task force who’s now an independent analyst based in Athens. “The situation isn’t so dire yet, but it could get there.”
Capital controls would be painful and unpopular with the Greek public, putting even more pressure on Tsipras to reach an agreement sooner rather than later, according to Gros of the Centre for European Policy Studies.
“The popularity of the government will plummet, and the economy would be hurt too,” Gros said.
Of course, the ECB knows very well that should a bank run commence then the days of the Tsipras government - capital controls or not - are numbered. Which is preicsely why yesterday it tried to precipitate one. And since, as we noted earlier, the only marker of Greek leverage is the response of the global capital markets, today's pre-determined market ramp, which started with the SNB's intervention in the EUR and has since transformed into a wholesale central bank binge fest across all assets (except gold of course), the corresponding reaction in risk is precisely meant to smash any trace of leverage the new Greek finmin may have hoped he had.
