Last week, we reported that the Greek banking sector lost some €400 million in deposits in a single day as Greek citizens debate a future which may include the suspension of salaries, pension fund plundering, and capital controls. Meanwhile, rumors swirled that Athens may fail to make €2 billion in debt payments on Friday to lenders which included the IMF, the ECB, and a certain blood sucking mollusk. As it turns out, Athens found enough money to make the payments thus avoiding a weekend “Grexiddent.”
On Monday, Alexis Tsipras will meet with Angela Merkel in Berlin where we assume no one will be causing any “kerfuffles” by sticking anyone else the middle finger. Meanwhile, the Greek populace is left to wonder if the government which just two months ago was billed as the savior that would finally throw off the chains of austerity bondage will be able to come up with a better plan than recruiting tourists as honorary tax collectors and pitch it in a humble enough way to convince European creditors to finally throw Athens a bone in the form of disbursing the next tranche of aid. We expect there will be more drama to come next week and as a primer on just how fearful Greek citizens truly are, we present to you the following from JP Morgan which nicely summarizes the evolution of distress in the Greek banking sector since December.
From JP Morgan on deposit flight...
The quantity of banknotes placed into circulation by the Bank of Greece has increased further by €2.7bn in February following a €4.9bn increase in January and €2.2bn in December, i.e. €10bn went under the mattress between December and February (Figure 4). This also means that of the €27bn of cash that went under the “mattress” between the end of 2009 and mid 2012, only €5bn has effectively re-entered the Greek banking system.
What portion of deposit outflows went under the mattress? €4bn of deposits left the Greek banking system in December, €12bn in January and likely €6bn in February (based on the purchases of offshore money market funds which we use as proxy for deposit outflows). That is between December and February €22bn of deposits likely left the Greek banking system and of this €10bn or 45% went under the mattress.
...and on the increasingly punitive cost of staying afloat...
Bank of Greece data also revealed how much more onerous central borrowing is becoming for Greek banks. For example in December Greek banks posted €10bn of extra collateral for borrowing an additional €11bn from the central bank, in January they posted €38bn of extra collateral for borrowing an additional €30bn and in February they posted €47bn of extra collateral for borrowing an additional €17bn. As of the end of February Greek banks had €104bn of central bank borrowing with collateral of €180bn, i.e. the average haircut was 42%.
....and on what happens next…
What will happen if Greek banks reach the maximum borrowing estimated above? The ECB has the flexibility to adjust haircuts to allow Greek banks to borrow more from the Bank of Greece for a given amount of collateral. So there is some flexibility in order to avoid triggering capital controls but what is clear is that the Greek banking system cannot withstand another big wave of deposit outflows.
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