Here Comes Another Greek Bank Meltdown

Greece’s four largest banks asked for government support to help counter a liquidity squeeze resulting from a significant flight of deposits in the first two months of the year. In addition the banks seek access to about €14bn in loan guarantees and €3bn of special bonds that could be used as collateral to borrow from the ECB.

The markets around the world have yet to recognize the complexity of this situation. When they do, it will also become apparent that Greece is part of a wider, and historically unfamiliar phenomenon.

Mohamed El-Erian

Local bank customers have transferred about €10bn deposits out of Greece. That’s about 4.5% of the total amount om money in the Greek banking system, according to Financial Times.  Share prices of the largest Greek banks fell by 4% Wednesday.

The four Greek banks seek access to about €14bn in loan guarantees and €3bn of special bonds that could be used as collateral to borrow from the ECB.

These are the remaining funds of the rescue plan that the government had put in place during the 2008 credit crunch that had not been taped yet, The Financial Times report.

The Greek finance minister,George Papaconstantinou, said Wednesday that the banks “have asked for access to the remaining funds of the support plan” – a €28bn ($37bn, £24.5bn) government package that was put together during the 2008 global credit crunch.

The banks’ request, which came as spreads on 10-year Greek bonds remained at record levels for a second day, flagged up concerns about the growing impact of the country’s debt crisis on the financial sector.

Bank Run

Local savers transferred about €10bn of deposits – equal to about 4.5 per cent of the total in the banking system – out of Greece in the first two months of the year, according to the Central Bank of Greece.

The transfers reflected “anxiety among wealthy Greeks about keeping assets here, given the increasing uncertainty,” an Athens-based private banker tells The Financial Times.

Many savers had chosen to move funds to their banks’ subsidiaries outside Greece, including Cyprus and Luxembourg, rather than switch to foreign institutions. Others had transferred funds to local subsidiaries of foreign banks, the banker added.

“We would expect these funds to return swiftly once the crisis is resolved,” he says.

Several bankers dismissed rumours of savers withdrawing large-denomination notes such as €200 and €500 to put in safe-deposit boxes or hold in cash as “mattress money,” FT writes.

ECB-rules Penalizes Greece

ECB’s new lending rules may end up hurting Greece more than helping it, Bloomberg reports.

At today’s ECB conference Jean Claude Trichet is expected to lay out the details of the ECB’s new collateral framework, to come into force in 2011, which includes a proposed “graded haircut schedule.”

A haircut is the risk premium central banks apply to securities they accept as collateral against loans. A 10% haircut on an asset means the central bank would lend commercial banks 90% of its value.

The ECB is proposing to apply bigger haircuts to assets with lower credit ratings. Due to its poor credit rating, Greek debt will thus be treated like poor collateral, so banks will no longer be able to borrow as much with Greek debt as collateral.

Professor of Finance at the Massachusetts Institute of Technology, Simon Johnson, is quoted saying that “the days of Greece being able to borrow easily at low interest rates in the euro zone will close once and for all.”

Financial Times notes that the renewed concerns about Greece have not yet caused knock-on jitters on Portuguese or Spanish bonds.

“This is a marked departure from previous bouts of Greek default fears. The path of Portuguese and Spanish spreads is key – the contagion effects of the Greek crisis are high on people’s worry lists. A few days of steady spreads is not enough to quash contagion worries, but if this persists it will encourage risk appetite,” the newspaper writes.

May Need To Cut Spending Further

The Greek newspaper Kathimerini reports that the Treasury’s latest expenditure projections for Greece suggest that most likely there will be a need for further spending cuts.

Three ministries have already disbursed more funds than they should in the first two months of the year:

The Ministry of Economy, Competitiveness and the Marine spent 18.2% of its total appropriation for this year, the Interior Ministry 17.4% and the Ministry of Labour 17%.

Even worse are insurances. OAEE health insurance for self employed has disbursed 41.7% of its assets.

The social insurance ΙΚΑ 25.3% and 20.4% NAT.

“Will Get Worse”

The chief executive of the worlds biggest bond fund Pimco, Mr. Mohamed El-Erian, predicts that the Greek crisis is going to get worse before they get better.

Alarming risk spreads will caution new investors and prompt late movers to sell Greek assets rather than buy. Against this background the blame game in Europe is likely to intensify. The solution to the Greek problem is undermined by the inability of the major players to credibly commit to the required level of coordination and trust.

As a result, no meaningful progress is made, the problems fester, and the risks of a disorderly outcome increase, Mr. El-Erian writes in an article in The Financial Times.

“Buoyed by a cyclical recovery, markets around the world have yet to recognize the complexity of this situation. When they do, it will also become apparent that Greece is part of a wider, and historically unfamiliar phenomenon – that of a simultaneous and large disruption to the balance sheet of many industrial countries. Tighten your seat belts.”

Related by the Econotwist:

“Greece Will Default”

Greek Debt Crisis Become Critical (Again)

Greek Bailout “Backstop” Confidence Trick Already Backfiring

Markets To Test Greece

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