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Dear Greek, take the Euronotes and run

February 5, 2015 Leave a comment Go to comments

Update (20:56 CET): Rumor has it that the ECB has 59,5 billion in Emergency Liquidity Assitance available. But, to be credible, it should be willing to provide backing for every single Greek deposit Euro.

The ECB is preparing a ‘Cyprus’ for Greece. So, dear Greek, change your deposit money for cash.

1) According to the ECB the European system of central banks still guarantees the 1:1 exchange rate of Greek bank deposit money and Cash. But the Eurosystem is preparing for a ‘Cyprus scenario’, i.e. it wants to have the possibility to renege on its promise of a guaranteed 1:1 exchange rate between Euro notes and Greek deposit money: the first line of funding of Greek banks has been cut loose  (emphasis added)

“4 February 2015 – Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

  • ECB’s Governing Council lifts current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic
  • Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review
  • Suspension has no impact on counterparty status of Greek financial institutions
  • Liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central bank, in line with Eurosystem rules” 

2. On ‘Twitter’, many say this should not be taken too seriously3. And the ECB itself states that the ‘reviews’ are far from perfect as they do not pay enough attention to financial risk, pro-cyclicality, financial stability and contagion (aside: one of the past advices was about the necessity of higher wage increases in the norhtern countries…)” there is scope to improve the analysis of: (i) interconnections, through a strengthened analysis of spillovers from shocks and policies; (ii) risks, by improving communication and being mindful of its pro-cyclicality; (iii) financial stability issues, by being more specific in proposals and further linking the financial and external sector analysis; (iv) external stability, through deeper analysis of rebalancing within the euro area and employing more gross balance sheet analysis; and (v) traction, by fostering the involvement of the pertinent authorities at the different stages of the surveillance process and increasing accountability on past advice”.4. I’m however very afraid. There is a real chance the ECB will provoke another Cyprus. The only rational advice to Greek households and companies is: take your money from the bank as the Troika madmen are coming.

  1. Pavlos
    February 5, 2015 at 1:01 pm
    Reply

    I wouldn’t recommend that the public do a bank run, but I’m afraid I agree with you. Eurozone parity (a Euro here equals a Euro there) has been a little below 100% throughout the crisis, and was knocked down several percentage points with Cyprus. That had relatively minor spillover. Perhaps emboldened, the ECB wants to break Euro parity for Greece.

    I think it’s a grave error for the ECB. Guaranteeing parity of bank deposits across institutions is a foundation of the monetary system and to renege on in takes us back to pre-Fed US banking where some banks were safer than others, their dollars were worth more than others, and barkeepers had to look up the exchange value of out-of-state dollar bills. The market is seriously underestimating the credibility cost of yesterday’s ECB move.

    The counterpoint, of course, is that the unofficial exchange rate between Euro bank deposits has its beneficiaries. Capital flows to Germany. Have a look at DAX versus other European stock indices. Purely a difference in competitiveness?

    Unless Ms. Merkel quickly acts to keep the Eurozone together, Greece will have to re-denominate its bank deposits to Drachmas and impose cash withdrawal and foreign exchange controls. This can be done over a weekend, possibly overnight, without the need to print or deface bank notes. In the morning, ATMs will be filled with a foreign currency (Euro) and Greeks will be making an FX conversion every time they withdraw or deposit, until such time as Drachma notes are introduced. Greece may choose to keep the dual currency system indefinitely (Euro cash, Drachma banking) for psychological reasons and to promote tourism.

    It’s not a far-fetched scenario, and it’s a direct consequence of the ECBs move to break parity on deposits, although of course the Greeks will bear the political cost. Depending on how skilfully Greece floats the new Drachma on the FX markets it may not be catastrophic: People who withdraw the morning after will lose some, and that’s it.

    For the Eurozone though, parity of bank deposits will be irreparably damaged. Unofficial M2 exchange rate arbitrage will accelerate capital flow to Germany and other countries considered safe, asset prices will continue to diverge in favour of core country assets, and TARGET2 accounts will look even more lopsided. It is hard to entertain why the ECB decided to take such a damaging move.

  2. guest
    February 5, 2015 at 2:58 pm
    Reply

    The Cyprus scenario is actually an intriguing point for which I never found an answer.

    I surmise that all constraints imposed on the Cypriot financial system have resulted in Euros in banking accounts outside Cyprus becoming more valuable commercially than Euros on accounts in Cyprus (or in Cypriot banks). Hence, when engaging in commercial transactions with Cypriot partners, these might be more interested in getting paid in “mainstream” Euros than in Cypriot Euros, and therefore be ready to grant discounts when paid in that way.

    Does anybody who has been involved in trading with Cyprus know whether this phenomenon has taken place?

  3. arjenpolku
    February 6, 2015 at 7:00 am
    Reply

    Reblogged this on Arjen polku and commented:
    I first though this was implausible, but have seen other posts noting that the ECB ‘lifted the waiver’ for Cypriotic bonds in 2012-2013 before shutting Cyprus out, and according to another blog the ECB has used this measure against Greece in 2012 when negotiations got tough. I hope the ECB is not doing another ‘Cyprus’ because then it will have lost all of its credibility and the belief that it negotiates in good faith.

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