Greece – The Moment of Truth Is Approaching Fast

After the ECB has made Greek debt no longer eligible for repos (note that this mainly concerns government bonds however, bank bonds that have been “guaranteed” by the government will however no longer be eligible after February 28 2015 either – these amount to a quite large € 25 billion), fears of an intensifying bank run in Greece are growing. At the end of December, Greek banks owed about € 56 billion to the euro system. This is estimated to have jumped to about € 70 billion since then.

These debts to the system have grown concurrently with a sharp decline in deposit liabilities since November last year, when it dawned on people that there might be an election. Unfortunately more up-to-date data aren’t available as of yet, but we will try to post them as soon as the Bank of Greece makes them available. However, there exist estimates regarding the extent of the decline in deposits since the end of December as well – very likely an additional € 15 billion has fled from the Greek banking system since then.

 

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Photo credit: Pressmaster via Shutterstock

 

 

Below are two charts showing assorted liabilities of the Greek banking system, with deposit liabilities shown separately in the second one:

 

1-Liablities of Greek banking system

Assorted liabilities of Greek banks – the boom and bust are nicely illustrated by this (assets have of course taken a similar course). “Liabilities to Bank of Greece” designate central bank credit to the banking system. This is estimated to have grown to around € 70 billion, replacing the approx. € 15 billion in deposit money that has likely been withdrawn since the end of December – click to enlarge.

 

2-Deposit liablities, Greek banksDeposit liabilities of Greek banks – total and domestic until the end of December 2014. A further € 15 bn. decline is estimated to have occurred since the end of December; this has been replaced with central bank funding. Some of this will take the form of “ELA” from February 11 onward, when the eligibility of Greek debt as collateral for ECB funding is withdrawn – click to enlarge.

 

In the meantime, the Greek government has warned that it will soon run out money, as the EU has refused to accept further treasury bill issuance for bridge funding purposes (which would have bought the Greek government some more time). The government’s tax revenues have collapsed, as Greece’s citizens largely stopped paying taxes when it became clear that Syriza was likely to win the election; this is a case of election promises coming to haunt the government, as it promised to rescind numerous taxes. In the wake of all this, S&P has downgraded Greece’s debt. According to the WSJ:

 

“Greece warned it was on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.

Greek Economy Minister George Stathakis said in an interview with The Wall Street Journal that a recent drop in tax revenue and other government income had pushed the country’s finances to the brink of collapse.

“We will have liquidity problems in March if taxes don’t improve,” Mr. Stathakis said. “Then we’ll see how harsh Europe is.”

Government revenue has declined sharply in recent weeks, as Greeks with unpaid tax bills hold back from settling arrears, hoping the new leftist government will cut them a better deal. Many also aren’t paying an unpopular property tax that their new leaders campaigned against. Tax revenue dropped 7%, or about €1.5 billion ($1.7 billion), in December from November and likely fell by a similar percentage in January, the minister said.

Other senior Greek officials said the country would have trouble paying pensions and other charges beyond February.

Greece has made no secret of its precarious financial position, but the minister’s comments suggest the country has even less time than many policy makers thought to resolve its standoff with Europe.

Eurozone officials have asked Greece to come up with a specific funding plan by Wednesday, when finance ministers have called a special meeting to discuss the country’s financial situation.

The country needs €4 billion to €5 billion to tide it over until June, by which time it hopes to negotiate a broader deal with creditors, Mr. Stathakis said, adding that he believes “logic will prevail.” If it doesn’t, he warned, Greece “will be the first country to go bankrupt over €5 billion.”

If the Greek government runs out of cash, the country would be forced to default on its debts and reintroduce its own currency, thus abandoning the euro. Most of the €240 billion in aid that Europe and the International Monetary Fund have pumped into the country would be lost.

[…]

Mr. Stathakis said Athens has asked for €1.9 billion in profits from Greek bonds held by other eurozone governments. In addition, the government wants the eurozone to allow Greece to raise an additional €2 billion by issuing treasury bills, he said.

Both proposals clash with the rules governing Greece’s bailout and eurozone officials have dismissed them.

 

(emphasis added)

Bloomberg reports that Jeroen Dijsselbloom let it be known that “we don’t do bridge loans”, which seems to have been one of the triggers provoking the S&P downgrade of Greece’s debt:

 

“The new government’s request for a debt writedown has already been rejected, and Eurogroup chief Jeroen Dijsselbloem on Friday rejected a request for a short-term financing agreement to keep the country afloat while it renegotiates the terms of its bailout program.

“We don’t do” bridge loans, Dijsselbloem told reporters in The Hague, when asked about Greece’s request. “A simple extension is possible as long as they fully take over the program.”

The European Union’s latest rebuff raises the stakes for Greece’s new government. The next showdown is scheduled for Feb. 11 in Brussels, when Greek Finance Minister Yanis Varoufakis faces his 18 euro-area counterparts in an emergency meeting after Tsipras delivers his major policy address to lawmakers.

Standard & Poor’s lowered Greece’s long-term credit rating one level to B- and kept the ratings on CreditWatch negative.

“Liquidity constraints have narrowed the timeframe during which Greece’s new government can reach an agreement with its official creditors on a financing program, in our view,” S&P said in a statement on Friday.

Greek stocks and bonds rebounded at the start of the past week after the government dropped its debt writedown demand. The trend reversed on Feb. 5, and the yield on 10-year bonds jumped 42 basis points to 10.11 percent on Friday, with the Athens Stock Exchange index falling 2 percent, after Dijsselbloem rejected the bridge financing.

 

(emphasis added)

Note the last sentence highlighted above: Greece’s financial markets got whacked once again after what transpired on Friday. Importantly though, the effect remained largely confined to Greece.

 

Who Has the Better Cards?

We have read a number of theories about the back and forth between the EU and the Syriza-led government last week. Some people are saying that Mr. Varoufakis (who is considered an expert on game theory) is deliberately using Greece’s weakness as a negotiating weapon, even going so far as to making the Greek government look weaker than it actually is.

Others have pointed out that it has actually become far easier for the EU to adopt an extremely tough stance. Note in this context that Italy’s finance minister was not amused at all when Mr. Varoufakis remarked on Sunday that Italy’s debt is just as unsustainable as that of Greece, and that it would likely become a victim of contagion if Greece were to default:

 


Italy’s minister of finance Pier Carlo Padoan was evidently not amused by Varoufakis’ comments on Italy’s € 2 trillion+ debtberg

 

It seems to have dawned on Varoufakis that one of the reasons why the EU is prepared to yield to any of Syriza’s demands is probably that Greece’s stock and bond markets are the only financial markets that are really getting hit badly so far. Contrary to 2010-2012, Greece’s troubles are no longer rattling markets across Europe, presumably because the European commercial banking system’s exposure to Greece has declined sharply.

Some 80% of Greece’s outstanding public debt are in the hands of the EFSF, the ECB and the IMF now. While quite a bit of interbank lending has been extended to Greek banks (some €19 bn.), this is mainly collateralized with EFSF bonds, so European banks are considered safe.

Nevertheless, a Greek default would affect some €240 bn. in European and IMF aid to Greece, not an inconsiderable amount. If these funds have to be written off, the EFSF guarantees of other euro area members would be called in. As a result, debt-to-GDP ratios in the rest of the euro zone would jump noticeably. Apparently though, the other EU members are willing to take that risk – they are betting that Greece would be hit much harder by a default and an exit from the euro area. In short, they believe they will prevail in the game of chicken.

 

3-ATGThe Athens General Index has once again turned down – click to enlarge.

 

4-Greece 10-Year Bond Yield(Weekly)10 year Greek government bond yields, weekly – almost at a new high for move. 3 year paper currently yields about 18.15%.

 

Greek bank stocks have not surprisingly taken the biggest hit. For instance, NYSE listed National Bank of Greece (NGB) is now down 99.83% from its 2007 high. This is presumably some kind of record (only one Cypriot bank and several of Iceland’s banks have suffered even more in the wake of the debt crisis, by going out of business altogether):

 

5-NBG-weeklyNBG, weekly: down 99.83% from the peak in 2007 – click to enlarge.

 

As the data below show, it was widely expected that Greece would finally pull out of its economic slump this year – however, this has now obviously become somewhat less certain.

 

6-DWO-WI-Wirtschaftdaten-Griechland-db-AufmGreek GDP and public debt – 2.9% GDP growth was hitherto expected in 2015. Given that this wouldn’t have involved an increase in government spending, it would have represented actual private sector type GDP growth, which contrary to the former is actually a sign of wealth creation – click to enlarge.

 

So the EU is at best willing to offer some face-saving cosmetic changes to the Greek bailout deal, but resolutely refuses to countenance any delays or substantive changes to the agreement. On the other hand, the Syriza government finds it impossible not to present something substantive to its voters and is therefore digging its heels in as well. One thing is certain though, the “contagion gambit” has not worked this time around – at least not yet.

Our guess is that the EU could probably be persuaded to “do bridge financing” after all, if the Greek government were to relent with respect to some, or rather most, of its demands. Markets probably won’t remain as unruffled as they currently are if no solution is found and Greece indeed ends up defaulting and abandoning the euro. The current relative calm is likely predicated on the idea that Greece’s government will ultimately have to give in. This could of course turn out to be a miscalculation.

The losses due to a Greek default would presumably not be impossible for the EU to absorb. However, they would increase the pressure on other governments to impose more austerity type measures as well, once they cough up for the guarantees they have given to the EFSF. In short, the Greek government is not completely without leverage. It just doesn’t have as much leverage as it would have had at the height of the crisis three years ago. Back then, a Greek default could have sent several other much larger countries over the brink.

 

Conclusion:

The moment of truth is approaching fast for Greece.

 

CPB-Bank-in-AthenCustomers waiting for a branch office of CPB bank in Athens to open. The queues are not as large as they once used to be, but that could yet change (incidentally, CPB is a Cypriot bank).

Photo credit: Picture Alliance / DPA

 

Charts and tables by: Acting Man, StockCharts, BigCharts, Die Welt, investing.com

 

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