Well the Greeks have spoken.
After years of “austerity,” a gross national product contraction of some 25% and an unemployment rate of over 25% (probably much higher) the Greeks rejected more decades of austerity. The vote wasn’t even close, contrary to the usual bullshit of the MSM that Greeks were evenly divided.
Greeks are unwilling to sacrifice their future in order to obtain a “bailout” the proceeds of which will primarily go to pay foreign bankers. Everyone is getting tired of paying banksters.
Greece needs debt relief in the form of write-offs on the books of German banks – something which the Germans are totally unwilling to do. How quick they forget how much German debt was forgiven.
All eyes now turn to the European Central Bank in Frankfurt – lender of last resort in the Euro-zone. Assuming a bank is solvent, the central bank (the Federal Reserve in the USA) funds the emergency liquidity needs of it’s member banks.
Banks normally keep a liquidity reserve of cash on their own books and invest the rest of depositor funds in loans and securities. If there is a run by depositors wanting their money, the Central Bank will step in, take certain assets of loans and securities as collateral and advance cash so that the bank can meet depositor withdrawals. Confidence then usually returns and deposits again begin to flow in allowing repayment to the Central Bank and the return of collateral.
There has been a run on all Greek banks and the Emergency Liquidity Assistance (ELA) line available to Greek banks is almost exhausted therefore Greek banks are currently closed with only limited withdrawals available at ATM machines.
Without an in increase in the ELA, Greek banks will soon run out of cash. Collateral offered by Greek banks is subject to a “haircut” – the ECB will lend only 50% of it’s book value further squeezing the Greeks.
The “no” vote yesterday means there is little hope for an increase in the total ELA line available. The ECB could consider reducing the percentage of the haircut but this is not very likely.
Failure to increase the ELA line means the Greek banks can’t open – they simply won’t have the cash to meet withdrawal requests. “The overwhelming ‘No’ vote has made it more difficult for the ECB to justify keeping that lifeline open.
“The ECB’s hands are tied by rules,” the head of the Austrian central Bank, Ewald Nowotny, told the media.
“We have to assess the situation each time anew. And I’m afraid that events in Greece have not made it easier for us,” Nowotny said.
“Without a clear prospect of an immediate bailout deal that could prevent a full-scale sovereign default … it is very hard for the ECB to authorize continuing emergency support for Greek banks, let alone to allow an increase in such support,” said Berenberg Bank economist Holger Schmieding.
The Bank of Greece has requested an increase in ELA liquidity.
ELA is currently the only source of financing for Greek banks, and therefore the Greek economy. But with Greece’s bailout program now officially expired and in the absence of any new program, the conditions for its continuation are no longer met.
But analysts believe the ECB will not want to be the one to pull the plug on Greece and force the country out of the euro currency. The bankers want the politicians to pull the plug.
“The ECB will not be the one pulling the trigger on Greece. As long as eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels,”
“We look for the ECB to play a holding game today, not cutting ELAs but possibly telling European leaders that without a clear political signal, ELAs would have to be cut soon,”
The hard line head of the German central bank or Bundesbank, Jens Weidmann, has consistently voted against ELA in recent weeks. And support for his hardline stance could grow on the ECB governing council. The Germans are becoming more spiteful. Shutting down the ELA would mean that the ECB would keep the collateral (it only advanced half it’s book value) totally wiping out the capital of all Greek banks and forcing Greece out of the euro-zone.
A two-thirds majority would be needed on the 25-seat board to shut down ELA.
Deutsche Bank economist George Saravelos predicted that for Greek banks, ELA liquidity was likely to be fully exhausted over the next few days.
That would leave cash machines empty and Greece would no longer be able to finance imported goods via outgoing payments.
The ECB’s patience is unlikely to last forever and could run out later this month, when Greece is due to repay 3.5 billion euros ($3.9 billion) in loans to the ECB on July 20.
If Greece is unable to meet the deadline and defaults on the payment, it is very hard to see the ECB continuing ELA,
The head of the French central bank, Christian Noyer, insisted that the ECB could not allow a restructuring of the debt Greece owes it.
And so it goes. Krugman today characterized the Germans as “medieval doctors bleeding their patient.”
It looks to me from here in Florida that Greece will leave the euro and return to the Drachma
Realistically, the value of the drachma would immediate plummet on international markets reducing the savings of Greek depositors in foreign currency terms and making it difficult to finance necessary imports. But many believe that the Greek economy would eventually recover, including many economists, who believe this is the way to go. The alternative is decades of continued “austerity” and unemployment.
An exit from the Euro would have little affect on poorer Greeks with little to lose. Imports would be more expensive or not available but Greek goods and food stuffs would still be and a Greek economy using the Drachma would encourage millions of tourists to visit for a “cheap” vacation bringing needed “hard” currency with them. It could work and it would give Greeks back control of their own monetary policy.
Enough with “austerity” – only banksters, who never experience it, think it works.
Good Luck my friends.
Great news of the large ‘No’ vote! Let’s hope the whole EU house of cards falls down now. (But I doubt it will…)
Best wishes, Pete.
I feel bad for the Greek people!
I read today where Austrians have almost unanimously signed a petition to withdraw from the EU. Sounds to me like another house of cards is ready to fall. And our time is coming soon, or so the economic experts claim.
I’ll just have to rely on my off-shore accounts to see me through;-) No caviar and the bubbly for a while, I guess. It’s back to eating cake and Kool Aid!
An excellent blog post. Thank you.
John – It’s easy for me to write about this stuff; I spent my entire working life in banking and retired a senior officer of one of American’s largest banks. Don’t hold it against me.
I really liked you and your posts Toritto – until you just said you are a retired banker. 😉
I really feel with Greece and its people. I truly hope this EU will fall apart as it has turned into such a bullying game of big and wanna-be-big powers who walk over dead bodies to protect their own interests. Quite sickening really.
Fear not Saefit! I was always a leftie and my colleagues knew it. I ran the international section for years and did what I could from inside – like refusing to extend funding to the fascist dictatorships in Chile and Argentina while many others did. I simply said I didn’t think it was “good business” for the bank. 🙂 We all must do what we can while trying to make a living. There is no need to totally sell out. And I like to think I never did.
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A “leftie” is a very good word in my books, Toritto! I work in the corporate world too but must be worlds apart from my bosses when it comes to personal convictions. Recently visited a Manhattan bank as a part of my studies, a visit that made me literally sick while listening to their boasting about. No morals whatsoever and yet – so much power! A scary combination!
Interesting article in the Telegraph about IMF director Christine Lagarde who keeps attacking the Greeks for not paying tax – it turns out she doesn’t pay tax on her salary: http://www.telegraph.co.uk/finance/economics/9298501/Christine-Lagarde-attack-on-Greece-backfires-as-she-pays-no-tax.html
“Don’t do what I do; Do what I say!!”