The Greek civil service and transportation workers have gone on strike; add to them the bankers and buyers for Greek debt!
Pressure builds on the Greek government and the banks buckle, instead.
ATHENS, April 7 (Reuters) – Greek banks have asked for access to the remaining part of a 28 billion euro state support package, highlighting pressure on the sector from the country’s recession and spiralling borrowing costs.
Greek bank shares initially trimmed losses after the announcement but later fell because growing worries over Athens’ ability to handle its mountain of debt drove the country’s yield spreads to a fresh euro lifetime high.
Data also showed Greek bank deposits had fallen 8.4 billion euros, or 3.6 percent of the total, since December.
That resembled figures some international media had reported were part of a wave of people taking cash out of Greece, but analysts said it was most likely due to effects of the recession and could not yet be judged as a significant amount.
They added that the banks’ request for aid could help the lenders face possible liquidity problems in the short term but would not reverse a grim outlook.
About 17 billion euros ($22.7 billion), mainly in state guarantees, remain in the scheme launched in 2008 to help Greek banks deal with the global credit crisis.
“The banks have asked to use the remaining funds of the support plan … They want to have additional safety, now that the economy and the banking system are under pressure,” Finance Minister George Papaconstantinou told reporters.
Some of the aid would come in the form of Greek government bonds, which the banks could use as collateral for loans from the European Central Bank, which said last month it would continue accepting them even if Greece’s credit rating was cut.
A banking source who wished not to be named said Greece’s four largest banks — National Bank of Greece (NBGr.AT), Eurobank (EFGr.AT), Alpha Bank (ACBr.AT), and Piraeus Bank (BOPr.AT) — had made the request to access the support package’s remaining funds last week. A decision on the allocation could happen by the end of the week, the source said.
The banks have already made use of part of the plan’s funding by issuing preferred shares to the state in exchange for capital injections. But the biggest part of the package, mainly state guarantees, was left unused.
What remains is a small pool of liquidity that is sure to be used up in the day or so in frantic attempts to plug the leaks. Sez Ambrose Evans- Pritchard:
Greece’s debt markets were battered for a second day as investors sought clarity on whether Athens was attempting to secure better terms for an EU rescue package or trying to exclude the International Monetary Fund from any bail-out operation.
The yields on 10-year Greek bonds rose to 409 basis points above German Bunds, a level that threatens to cripple Greece as it struggles to raise or roll over about €20bn in debt over the next two months. Credit default swaps on Greek debt rose above Icelandic debt on Wednesday and are now far higher than those of Hungary and other states in IMF care.
The move to support the banks came after it emerged that Greek citizens had shifted €10bn abroad in the first two months of the year, a pattern that replicates the build-up to Argentina’s default in 2002. There are reports that Commerzbank and other eurozone banks have begun to pull credit lines to Greece, starving the system of liquidity.
“Greece’s weak fundamentals are being rudely exposed,” said Stephen Jen, of BlueGold Capital. “I’m afraid there will not be enough time for Greece to appease impatient investors. I think the probability is high that Greece eventually defaults.”
He said the country needs many times the €25bn package being touted, and even then it may only delay the day of reckoning. He demanded a “mea culpa from the EMU zealots” who placed Greece in an untenable position, saying they should admit their errors, “just as the managers from Toyota apologised for their mistakes”.
Investors are mystified by conflicting stories from Greece over the role of the IMF which give the impression that Athens is bitterly divided over austerity demands.
Austerity is a big word that means that Greece cannot possibly pay its debts since production – whatever that means in Greece – shrinks faster than debt service costs … which are not likely to shrink but expand.
It appears the Greek government has outmaneuvered itself, hoping to play the EU against the IMF to obtain cheap financing. With both entities playing ‘Alphonse, Gaston’ the Greeks are now facing punishing debt service costs that are compounding out of control.
And so the Greek funding crisis shifts to a liquidity crisis yet again. Banking News reports that Commerzbank, among many others, is now pulling its repos with Greek banks, essentially killing liquidity in the entire financial system. Cue Lehman Brothers and Sunday CDS trading. At least it’s not Friday so OTC traders don’t have to worry they will be pulled from their Hamptons retreat. The Greek website is reporting that according to sources, Commerzbank which is one of the biggest repo counterparties to Greek institutions, was dumping bonds in yesterday’s sell off. Not only that, but it is now pulling repos, in essence starting a cascade of asset liquidation, in which banks, already experiencing a depositor run, will be forced to sell assets at any prices they can get just to fund their operations for one extra day.
A Google Translated version of the Banking News piece:
According to information Commerzbank was concerned about the Greek bonds accepted as guarantees of Greek bonds. Commerzbank has provided some liquidity to Greek banks are more concerned about the Greek bonds. Based on a reliable source in the recent past, foreign banks have applied to withdraw repo with Greek banks even offer powerful bonus.
The piece concludes:
… if the ECB require foreign banks to reverse repo agreements then it is obvious that the situation will worsen.
The Greek swells are removing cash deposits from Greek banks; this is added to the failure of the government to find roll- over funding. It is hard to see how the current Greek government going to last out the rest of the month!
Of course, if the Greeks default instantly it would certainly spare a lot of the drawn- out nonsense that has accompanied IMF interventions in the past. Here’s Peter Boone and Simon Johnson:
There are disconcerting parallels between Argentina’s catastrophic decade, 1991-2001, which ended in massive default, and Greece’s recent and impending difficulties. The main difference being that Greece is far more indebted, is much less competitive in global markets, and needs a commensurately greater fiscal and wage adjustment.
At the end of 2001, Argentina’s public debt GDP ratio was 62%, while at end 2009 Greece’s was 114%. Argentina’s public deficit reached 6.4% GDP in 2001, while Greece’s was 12.7% GDP (or 16% on a cash basis) in 2009. Both countries locked themselves into currency regimes which made it extremely painful to exit: Greece has the euro, while Argentina created a variant of a currency board system tied to the US dollar. And both countries had seen their competitiveness, as measured by the “real exchange rate” (which reflects differential inflation relative to competitors) worsen by 20% over the previous decade, helping price themselves out of export markets – and boosting their consumption of imports. In 2009 Greece had a current account deficit equal to 11.2% of GDP, while Argentina’s 2002 current account deficit was a much smaller 1.7% GDP.
The solution to such crises is rarely gradual. Once financial market confidence is lost, yields on government debt soar, private capital flees, and sharp recessions occur. The IMF ended up drawing tough conclusions from its Argentine experience – the Fund should have walked away from weak government policy programs earlier in the 1990s. Most importantly, IMF experts argued that from the start the IMF should have prepared a Plan B, which included restructuring of debts and termination of the currency board regime, since they needed a backstop in case the whole program failed. By providing more funds, the IMF just kicked the can a short distance down the road, and likely made Argentina’s final collapse even more traumatic than it would otherwise have been.
Sadly, the Greeks are today in a similar situation: the government’s macroeconomic program is not nearly enough to calm markets, or put Greece’s debt on a sustainable path. By 2012 we estimate Greece’s debt/GDP ratio will rise from 114% of GDP to over 150%. The interest payments alone on this would amount to 9% of Greek’s incomes at current rates, and almost all those funds are transferred to the German, French, and Swiss debt holders.
Greece’s 2010 “austerity” program is striking only for its lack of credibility. Under that program Greece, even in 2010, does not pay the interest on its debt – instead the government plans to raise 52bn euros in credit markets to refinance all its interest while at the same time it borrows 4% of GDP more. A country’s “primary budget” position measures the budget without interest expenses — at the very least, the Greeks need to move from a 4% of GDP primary budget deficit to a 9% of GDP primary surplus – totalling 13% of GDP further fiscal adjustment, in the midst of what will be a massive recession, just to have enough funds to pay annual interest on their 2012 debt. This is under the rather conservative assumption that interest rates would settle near 6% per year, where they stand today. The message from these calculations is simple: Greece needs to be far more bold if its austerity program is to have a serious chance of success.
How did Greece manage to get into such a terrible situation? Local politics that lead to profligate spending is one answer. But remember that someone needs to supply the money that allows such profligacy. In this case it was the European Central Bank that handed Greece the keys to the safe.
The reason Mr. Trichet wants Europe to stand tough against GreeceThis may not be obvious, but, creating money in a currency union is no simple task. In any single country, central banks usually restrict themselves to buying government bonds, and making loans to regulated commercial banks. Net purchases of these securities by central banks creates what is called “high-powered money”; this feeds into the financial system and results in the creation of what we all use to make payments and store value, i.e., money, plain and simple.
However in the European Monetary Union there are now 17 nations and a plethora of banks. So, to put it crudely, there is sure to be a fight to decide who gets the newly printed funds. The ECB resolved this by what seemed like a fair rule: All commercial banks can borrow from the ECB if they provide collateral, in the form of highly rated government and other securities, to the ECB. So, for example, a Greek bank can gain liquidity by depositing Greek government bonds with the ECB – as long as those bonds are “investment grade”, i.e., highly rated.
This simple and seemingly reasonable rule created great dangers for the eurozone, which have come back to haunt Mr. Trichet. The commercial banks in the zone are able to buy government bonds, which “paid” 3-6% long term interest rates (for all the sovereign bonds of members) over the last decade, and then deposit them at the ECB. They could then borrow from the ECB at the ECB financing rate, which today is 1%, against this collateral so pocketing a profit — and then buy more sovereign bonds with the funds. Mr. Trichet recognized this system had inherent dangers of turning into a new Ponzi game: if nations spent too much, and built up too much debt, eventually the system would collapse. So at the foundation of the eurozone, Mr. Trichet led a contingent within the EU that demanded all nations live by a “Growth and Stability Pact”, whereby each nation could only run deficits of 3% of GDP, and they had to keep their debt/GDP ratio below 60% of GDP.
Of course, politics trumped Mr. Trichet – as it always must – and the Greeks, along with the Portuguese, used their new found cheap lending system to run large deficits and build up debt. The cheap access to money also helped feed the real estate booms in Ireland and Spain.
It’s also unstated that all the Euro nations made use of the EU money machine and all ran up big debts.
The core of the problem is this: how does it all end? The thrifty Germans cannot risk the moral hazard which looms on one hand. The now- too- late bailout of Greece portends dependency upon Germany for the rest of Europe. On the other hand, default of one leads to default of the rest as all but Germany have the same sort of shaky tourist- driven ‘competitiveness’. All built real estate bubbles of some kind or other, all make cars and other waste monetizers and all pimp ‘luxury’ brands with the real goods made in China with cheap sweat labor. All have massive welfare states and bloated pension liabilities along with large percentages ‘working’ directly for the state.
Neither Germany nor the IMf can bail out the entire Eurozone. Only a restructuring that openly acknowledges the resolution (repudiation) of unredeemable claims can provide a new start. The outcome of this will be the banks will take another hit. There really is no other choice. When Greece defaults, the bank runs will begin in other Eurozone countries. Ironically, the perceptive pundits that have been calling in vain for this sort of action to take place in the US finance have an opportunity to see if this can take place in Old Europe.
The flood of euros looking for a place to hide would be a tonic for the US Treasury. It’s a zero- sum, hard- dollar world out there. Dig carefully into every business failure, every basis point widening, every frantic call the to finance ministry you will see a little dollar lurking, blinded by the sudden light!
An obstacle to restructuring would be the dilemma that is embodied in the IMF itself; a bastion of realism and restructuring experience alongside the cadre of Neo- liberal ideology that would likely refuse to completely restructure the private debts that will remain uncollectable post whatever string of defaults the current Greek adventure unleashes.
It is not for nothing that the French are strongly opposed to IMF interference as it looks to its public health and welfare programs and sees them all on the IMF chopping block.