Sometimes I can miss the blindingly obvious.
Like other observers of the widening sovereign debt crisis in Europe, we’ve commented on the fact that the big reason for Germany to work towards a rescue (more likely, the end game is a restructuring) of Greece and other Club Med members at risk is that its own banks, like those of France, are exposed if Greece defaults. Given that Eurobanks were thinly capitalized in the runup to the crisis and have recognized even fewer losses than their US counterparts, they are still fragile and vulnerable to systemic shocks. So the axis of contagion seemed to be through bank holdings of Greece sovereign debt (as well as having written CDS on Greek debt).
But we neglected to consider a more direct source of trouble, namely, that of bank runs in the countries at risk. John Mauldin’s latest newsletter tells us that is already underway in Greece:
Money is flying from Greek banks, which makes sense, as how can a bankrupt Greek government guarantee Greek bank deposits? I know that Greek bankers may have a different view, but Greek depositors are voting with their feet. And …it is not just Greece. It is fast becoming Portugal. And Spain is not far behind in my opinion.
Yves here. Despite all the noise about government debt defaults, the pattern in the Great Depression was selective default (war debt being the big favorite). However, this was also an era before bank deposit insurance was the norm for advanced economies. Moreover, Europeans may be even more quick trigger to pull funds out of banks, given that they have more direct experience of the fragility of governments (World War II memories, the implosion of Yugoslavia on its borders, the impact of general strikes). Recall that in the financial crisis, many US depositors were nervous about bank safety (witness how bank analysis service Institutional Risk Analyst offered a retail bank soundness product to cater to inquiries).
So we have a second potential axis of contagion, via impairment of banks in the Club Med countries themselves. That has the potential to affect:
1. Bondholders of banks in Club Med countries (witness the virtual shutdown of bond issuance in Europe)
2. Companies, whether domestic or foreign, who do business in Club Med countries (transactions are normally settled in local banks; finding banks both sides to a commercial deal will find acceptable may loom as a issue)
3. Most important, interbank markets
So far, the reaction to the Greece/Club Med crisis seems to be a generalized widening of risk premia (ex the US, where investors seem to believe the eurozone can implode without having any adverse impact here). We may start to see more differentiation, in particular, further widening in exposures that are arguably on the front lines, as the crisis grinds on.
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Paging Tim Geithner or the Greek equivalent.
1) How much liquidity is the European Central Bank providing to Greek banks;
2) How much of the collateral from the banks is Greek sovereign debt;
3) How is the ECB marking Greek bonds?
According to my reading, the ECB has no limit on how many Greek sovereign bonds it accepts as collateral. It accepts them at face and presumably carries them on its books at face as well.
The ECB will continue this policy through the end of 2010, as long as at least one of the ratings agencies rates the bonds as non-junk. After this year, or if all the ratings fall, it’s time for the ECB to say ‘but this is an emergency, so we do whatever we want’. The USA shows how well that policy works.
Paging Tim Geithner….
Geithner is likely either asleep or at a circuit party. I’m not sure why you want him to be called though in the first place – umm what exactly do you want him to do?
These Asians just won’t stop, changing appearance and running up debt, that we set them up for…shez.
This has been happening since at least February. At some point I expect the bank run contagion to spread to other European countries and eventually to the US.
http://whatisthatwhistlingsound.blogspot.com/2010/02/coming-bank-runs.html
Agreed, wealthy Greeks had been pulling out their money as soon as the talk of austerity programs started, but the withdrawals seem to be accelerating.
Rumor among European gold dealers is that Greek (and probably other PIIGS) buying has been a major factor in the recent strength of the metal.
Memory says that a recent crisis was related to the inability to get letters of credit for commerce. Nice concept that the dangerous run will be inside the at risk countries rather than the bondholding banks with newly derated junk. The bank runs exist both in the physical withdrawal of deposits and in the withdrawal of credit. The latter may be the quicker.
How to get from point A to point B, from fiscal deficits to tanks in the streets is the question. The destruction of commerce may be faster than slashing transfer payments.
The ECB must not only protect the German banks, the ECB must maintain commerce.
Yves can you once for all stop to use, as most of your english-speaking contributors…, derogatory expression such as ClubMed or worse PIIGS….I know USA and GB are just paradises full of people much more intelligent, hard-working, and so on than the rest of the universe…but it is only because you are printing money like crazy that you are still alive. I can not wait to see the pound after the british election….
BTW FMI intervention will put USA on the bill, also….
Alain, my friend, everything you say is true except that I am confident that Yves–and many of my fellow english speakers–mean nothing derogatory towards the, err, countries-who-we-need-a-pc-name-for. It is a source of some bemusement, not to mention trading losses, that the crimes and idiocies committed in the USA are first becoming visible in other countries. I for one applaud criticisms of US business practices; after most everyone who lives here is too fat and happy to complain, and someone ought to speak up…
Not to fear Alain.
I’m an an English speaking American who drinks Budweier, watches football (the real kind, with a pointed brown ball you throw, not the girly-man one where everyone runs around in chaos kicking the damn thing) and I pump iron like a tatooed gun owner. My acroynms of choice are:
For the so-called PIGS, I say STUDS = “Sane and Tranquil Utopias with Delerious Sunshine”
and as for the U.S. and other Anglo financial potholes, I say DUSTS = Debt-laden and Usurious Sanctuaries for Taxpayer-looting Sociopaths
Cheer up, my friend, the world is not against you. :)
Full disclosure: I’m an American born Australian naturalized 30-something
Personally, I find PIIGS as a useful acronym rather then a derogatory term. I guess GIPSI also works, but I can’t say that less derogatory =) I personally find ClubMed less useful, as I think of the Caribbean rather then Europe.
If it helps, you can refer to the Anglo’s as SWINE (Scotland, Wales, Ireland, Northern ireland, and England)! I was less successful coming up for something for us Yankees (as we tend to name sports teams after the derogatory terms given to us Gringos =)
Cn
alain:
I’m not sure if English is your first language or not, but I doubt that in general PIIGS is meant to be derogatory. It’s just easier to say than “Portugal, Italy, Ireland, Greece, and Spain”.
I would guess that few if any people associate PIIGS with the swine animal.
It’s similar to the BRIC countries. nobody thinks that Brazil, Russia, India or China are bricks! It’s just easier to say
we could try for other words like GIPSI, but my guess is that more people would be upset with GIIPS (which indicates someone who cheats you) or GIPSI (indicating an ethnicity)than PIIGS. I can’t find any other word combo that works and is easy.
unfortunately, once a phrase like this gets out it’s nearly impossible to put back in the bag.
‘Companies, whether domestic or foreign, who do business in Club Med countries (transactions are normally settled in local banks; finding banks both sides to a commercial deal will find acceptable may loom as a issue)’
Nope – a large part of intra-eurozone trading is not done through local banks, unless by ‘local’ you mean something like ING Group is local to the Netherlands, or Deutsche Bank is local to Germany, or Santander is local to Spain, etc. But hey, I just work at an European ERP company, whose wife actually does accounting programming for such ‘intrazone’ transactions, which means this can easily be dismissed as anecdotal. Factual, but anecdotal. Based on direct experience of what our customers are doing and require, but anecdotal.
Covered bonds are melting from Iceland to Greece. I imagine Hank Paulson still thinks these will help bail out Wall Street Narcotic/derivative Dealers… The next tsunami will be the credit wave going the other direction, and that giant sucking sound of screams from the trillions of bucks that were sitting on the sidelines, the trillions that decided to come out to collect those flopping fish on the low tides , and ahhh, this kinda reminds me of that scene from The Perfect Storm, where the boat is filled to capacity with fish, and then the wave hits…. ooops, guess it wasn’t safe after all. Maybe just one more fish….
++> Credit rating agency Standard & Poor’s lowered its rating on Alpha Bank’s Greek covered bond program to A- from AA-.
“Credit rating agency Standard & Poor’s lowered its rating on Alpha Bank’s Greek covered bond program to A- from AA-”
Thanks, DocHoliday. You know, I’ve had it with the bad news about Greek banks. I’m getting in my car as soon as I finish drinking this frappe, and drive down to Alpha Bank to cash out all my accounts with them. I’m not joking.
Vinny
Vinny here with an update. I just cashed out my accounts with Alpha Bank. Yes, they gave me lots and lots of dirty looks. And out of spite they gave me all in 20 Euro bills… so I better get a bigger mattress right away.
Another thing. This place (Crete) is getting a bit too chaotic for my taste. I think it’s time for this ole’ boy to sit this storm out on the beach… in Florida.
Vinny
Hey Vinny,
I was planning to visit Crete this summer but given all this brohuha over Greece going bankrupt what would you suggest?
Thank you.
You’re coming back already?
It’s just getting interesting. I myself am starting to itch to jump on a Space-A flight to Rota, Sicily or Crete. Before DoD declares this an operational theater and stops carrying Space-A passengers on flights there.
Florida’s dull, Vinny. They’re even starting to build some houses here again.
Iron Ranger 5?
Krugman’s backpedaling on his Euro-triumphalism:
http://krugman.blogs.nytimes.com/2010/04/28/how-reversible-is-the-euro/
It turns out that the existence of the Euro isn’t such a totalitarian law of the universe after all, the way he’s been saying all along (he still says the same thing about Wall Strret rackets and the Bailout, however).
It turns out, he has now discovered, that if the bank run occurs on its own without first consulting with elite globalization mandarins like himself, then maybe a Euro unravelling can simply be a fait accompli after all.
The lesson, though he didn’t phrase it that way, is that everything which politically exists is an embodied political decision, and can therefore be changed at the people’s will by another political decision.
(How’s that for a “law of nature”, Dr. Krugman?)
Not that a bank run is strictly a “political” event, but for purposes of this context we can categorize it that way.
seriously, Mr. A, you’re better off reading Yahoo Sports each day than PK’s political wind vane rants. Yeah, the real news is that the BoSox are a bit slow so far, and that McNabb trade from the Eagles to the ‘Skins shook my head around. And good to see that JC got a job in Oakland. Glad PK isn’t opining on all that stuff — it would take some real imagination — but I don’t read him anyway, so who cares. ha ha ha. I think he hurt his brain with two many Cartesian graphs. Did you ever consider just what DesCartes wrought with his two-dimensional graphical parsing of multi-dimensional reality? To be honest, I think he was just joking.
Descartes also thought the body is just a machine, while “the soul” is some mystical thing temporarily inhering in it.
Maybe that throws light on economists and their theories. “The economy” and “the market” aren’t bounded by the natural resources of the earth and the physical energy available, no! Not at all!
It’s the mystical “soul” of the earth, and civilization is simply the imperfect physical appendage of the market’s ineffable majesty.
Those filthy “workers”, too. Labor’s just a physical cost you can minimize, while consumption is part of the Cartesian or Platonic soul of the world. “Contradiction” of capitalism? Not at all. Some stubborn peasants just fail to see the beauty of the metaphysics.
No wonder entrepreneurs are selling gold out of vending machines in Europe: there’s a collective memory of the fragility of states and currencies.
On reason why it is very difficult for European politicians to help Greece:
In Greece, you get a bonus for showing up for work.
Unmarried daughters can continue to collect their father’s pension after he dies. Etc etc.
http://www.thestar.com/business/article/802042–in-greece-you-get-a-bonus-for-showing-up-for-work?bn=1
The widespread translation of such articles into German is a primary problem.
I know! The single currency zone can:
1. Introduce capital and currency controls at every member state’s borders.
2. Make publishing economic news about individual EU member states crimes of racial hate incitement and xenophobia.
3. Require all websites, newspapers and broadcast media to obtain EU licenses from an apparatus in Brussels. Then only issue licenses to those willing to republish EU and ECB press releases as their sole content. This office can be named the “EU Commission For Human Rights and Freedom of Speech and the Press”.
4. The Chinese government will undoubtedly provide expert advisors to set up filter controls on all internet sources external to the EU.
Yes indeed. E! – U! Peace! Freedom! Prosperity! Security! Human Rights! E! – U! E! – U! E! – U!
How do those plain vanilla fx derivatives work? If I’m buying, say diesel fuel, on long term contracts in dollars and selling in euros, how do I hedge that currency exposure (other than futures) and who is on the zero sum end of that trade?
Yves, from Reuters
FRANKFURT, April 29 (Reuters) – Deposits at Greek commercial banks rose in March, European Central Bank data showed, despite concerns that debt worries might prompt a flight of capital out of the country.
Deposit liabilities rose to 368.1 billion euros from 362.3 billion euros in February, the highest since records began in March 1998, non-seasonally adjusted data showed
“ex the US, where investors seem to believe the eurozone can implode without having any adverse impact here.”
For how long?
Does it matter how long? The combined speculation/PR-war the UK and US have started against continental Europe end of last year was an act of sheer desperation to begin with.
Sure, screaming headlines and orchestrated credit downgrades (like wednesday’s series, conveniently timed to benefit the major UK gilt issue the same day) will buy the angloscum some time. After all, government bond issuance has become a matter of beggar-thy-allies to these fucked up desperate debt-slaves.
But it can not disguise that the fiscal position of the US and the UK is much, much worse than the eurozone’s, Pigs and all. And the latter’s growth prospects are much better. European companies, especially manufacturing, have been posting tidy profits all year. Exports for Germany and the Netherlands are way up, boosted by EM-demand. Europe seems to be decoupling from the US. The UK’s mysteriously persistent triple A rating is starting to look like The Joker’s lipstick.
Of course, creating a financial panic in your main trading partner’s currency zone to distract from your own much larger fiscal mess is pretty dumb to begin with. It’s also borderline sociopath. Presumably the British public doesn’t even notice. Dumbed down and demented by lousy education, corrupted media and endemic bingedrinking.
Just as it doesn’t seem to notice the UK’s looming government debt disaster has been declared Omerta in the election campaign. All three party’s political programms are shams, to be replaced instantly after the elections with very tough austerity plans that still won’t avert catastrophe.
No, we will not accept refugees.
Greek National bank is closed after 3 employees were killed during the protests. This maybe be the trigger to start run on the banks in Greece as people realize they can not take their money out