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Greek Bank Deposit Outflows Spike As Capital Controls Concern Spreads

With Greek bank bonds collapsing, stocks near record lows, Greek default risk at post-crisis record highs, and Greek government bond yields spiking, it has been surprisng that we have not seen the ATM lines and generalized 'panic' of a population in fear of being "Cyprus'd." Well, now as ekathimerini reports, that appears to escalating and rapidly as credit sector officials estimated that the flight of deposits yesterday alone amounted to 350-400 million euros, which was some five times higher than the daily average in previous days.

As ekathimerini reports, Greek banks are suffering from fresh turbulence due to the tension and the apparent collision course between Athens and its creditors. Bank stocks gave up more than 8 percent of their value on Wednesday, while the outflow of deposits was far greater than on previous days.

Credit sector officials estimated that the flight of deposits yesterday alone amounted to 350-400 million euros, which was some five times higher than the daily average in previous days. They added that Wednesday’s withdrawals totaled the most since an agreement was reached at the February 20 Eurogroup meeting.

This followed Tuesday’s statement by Eurogroup chief Jeroen Dijsselbloem regarding the possibility of imposing capital controls in Greece. There was also a flurry of statements from Greek and European officials that aggravated the climate between the two sides, a phenomenon that continued on Wednesday. As we noted previously...

The Eurogroup cannot impose capital controls on Greece. Our understanding is that only the Greek government can impose capital controls (restrictions on bank withdrawals, cross-border transfers) and this would require the consent of the European Commission, as guardians of the single market.

 

Tsipras knows how unpopular this move would be and has no desire to be driven into it. The ECB could force Greece by making capital controls a condition for continued ELA, but is trying hard to avoid becoming an active player in the Greek drama.

 

Still, a resumption of accelerated deposit drain as the conflict between Greece and its creditors continues seems quite plausible. And if this happens the list of options is very thin.

 

The fact that Dijsselbloem has highlighted the possibility of capital controls makes this outcome more likely. Depositors may now withdraw funds to avoid restrictions on their bank accounts and end up forcing the very imposition of capital controls their individual actions were intended to preempt.

 

What is going on? One possibility is that Dijsselbloem made a rookie mistake at a time when he is deeply frustrated with Athens. Another is that he fully intended to ramp up pressure on the Greek government to move forward with program implementation by raising the specter of Greek citizens being unable to access their bank accounts. Neither is particularly encouraging.

In this context banks are worried about a new surge of withdrawals while the credit system is at a marginal point and with the European Central Bank only supplying liquidity drop by drop.

On Thursday the governing council of the ECB is expected to renew the financing of Greek lenders through the Bank of Greece’s emergency liquidity assistance (ELA) mechanism and will probably increase the limit of funding that now stands at 69.4 billion euros. The increase will again be small, just as was the case at the last few meetings of the ECB board, aimed only at covering necessary cash needs.

Deposits and the credit system have taken a big blow in the last few months due to the political and economic uncertainty as well as the absence of any progress toward finding a solution to the standoff between Greece and its creditors. Banks estimate that the deposits of households and enterprises have declined by as much as 26 billion euros since the end of November, and today amount to no more than 138 billion.

Bank of Greece data showed that deposits shrank by 4 billion euros in December and went on to drop by 12 billion in January. Bankers estimate that the outflow has amounted to another 10 billion euros since early February. Therefore deposits have declined to their lowest level since the outbreak of the financial crisis in 2010, while banks’ smooth operation is secured by the funding of the Eurosystem.

 

 

 

Domestic lenders had tapped a total of 104 billion euros through the ELA mechanism of the BoG and from the ECB by end-February.

Of course the liquidity crisis has had a direct impact on the issue of loans. According to credit sector officials, all procedures for the issue of new loans have been frozen for the last few months, thereby reversing plans for a credit expansion within 2015.

They also point out that unless there is an agreement between the government and its creditors soon, in order to lift the uncertainty, then the consequences on the Greek economy will be such that they will be impossible to reverse even if a better agreement is eventually reached with the country’s eurozone peers.

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The massive surge in deposit outflows should be no surprise...