The Real Greek Tragedy

‘The people of Greece are withdrawing their savings from their own banks at a phenomenal pace’

The Greek government continues to hold out for a better bail-out deal. Greece’s bargaining position has deteriorated dramatically in recent months. As the Syriza lead coalition took power in January, Greece was actually starting to enjoy its strongest period of growth since 2008. The economy despite the lack of reform had bottomed and recovery was in progress. It is disappointing to see how quickly that position has been lost. Soon after Alexis Tsipras became Prime Minister, the ECB surprised many by announcing that it would no longer accept Greek bonds as collateral for cheap loans. Greek banks could therefore no longer borrow new money from the ECB, limiting the ECB exposure to Greece.

Greece’s debt mountain stands at €320bn. The cash strapped government has been struggling since February over the further release of €7.2bn. In June it is due to repay €6.75bn to its principle creditors (ECB, IMF and bond holders), in July €5.95bn and in August €4.38bn. It is the repayment of these loans that are being negotiated without success as yet.

Figures show that private sector bank deposits shrank by €4.6bn in April down to €133bn the lowest since 2004. The people of Greece are withdrawing their savings from their own banks at a phenomenal pace. Since January’s general election, €30bn has been withdrawn. So far what has happened is not a full scale run on the banks but it is a fast jog and big enough to cause concern. If Greek citizens take enough money out and banks cannot replace the liquidity with loans from the Bank of Greece then their banks will fail. The ECB are in control of the emergency liquidity assistance (ELA). Greek banks have been told that as long as they remain solvent and have adequate collateral they will continue to receive funding. However, with the realistic possibility of Greece leaving the Euro and reinstating the Drachma at a 40%-50% devaluation rate, who would hold their money in Greece?

The likelihood of a forced Greek exit from the Eurozone is higher than ever. It seems clear that Germany in particular is warning Greece “enough is enough”. This raises the question of a potential spill over effect into other markets. The risk of default contagion is greatly reduced as compared to the last Grexit threat back in August 2011; Greece is a relatively smaller economy and has greatly reduced its banking sector exposure. The greater risk is a loss of investor confidence but even this has been minimised by the ECB QE programme buying up European corporate bonds. If Greece does exit from the Euro it will be expected that equity and bond markets will see greater global volatility and initial significant losses. However banking contagion should be limited to other peripheral European markets. We do however ultimately expect a classic European and IMF deal to be reached to keep Greece in the Euro, but the chances are reducing by the day as each side becoming more entrenched.

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