Philip Pilkington: Why the Germans Probably Won’t Allow Greece to Exit the Euro

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

Well, there’s been a lot of talk recently about a potential Greek exit from the Eurozone. Some, like Marshall Auerback , have been calling this a lot of hot air and in seems that, in light of recent events taking place from deep within the bowels of the Eurozone banking system they may indeed be correct.

Yesterday, Gavyn Davies over at the Financial Times blog ran an excellent piece on the silent bank run that has been taking place across Europe since the sovereign debt crisis began. It would seem that the bank run has sped up somewhat, as many will likely be dimly aware of from recent articles about bank deposits moving out of Greece. The extent to which it has accelerated, however, is quite interesting and can be seen in the following chart which tracks the Target2 interbank lending system in the Eurozone:

As the reader can see the flight out of the ‘dodgy banks’ in the periphery has increased quite a bit.

The reason for this, as Davies points out, is not the type of reason classically associated with a bank run. In a typical bank run depositors get nervous that the bank will not be able to fork over their cash should they want it. Many may remember the Simpsons scene where the hapless bank clerk tells panicking customers that their money is “at Bill’s house… and at Fred’s house”. Well, that’s basically your classical bank run. So, all the central bank has to do to counteract it is to step in and provide the liquidity. Then depositors will come to see that their money is guaranteed to be safe because the central bank — which prints money — is standing behind their bank ready to meet their desire for hard cash. The ECB, for whatever else it has done wrong, has performed this role perfectly throughout the recent crisis.

However, the bank runs nevertheless continue. Why? Because this is not, as Davies points out, a typical bank run. The reason that people are moving their deposits from peripheral banks to core banks is not because they are concerned about the peripheral banks’ ability to repay. Instead they are concerned that their government might exit the euro and reissue its own currency. In that case there is a good chance that if their deposits were sitting in a bank in their own country they would be converted into the new currency and, hence, automatically devalued vis-a-vis the euro (or neo-Deutschmark if the whole thing fell apart). If the depositor moves their money to a German bank, however, this shouldn’t be a problem — and given that there are no capital controls in Free Europa, moving your money is pretty easy.

The real problem — for the Germans, that is — is that, as Davies points out, in preventing a bank run the ECB is loading up on some pretty serious risk:

“As deposits are withdrawn from Greek banks, the ECB replaces these deposits with liquidity operations. If these are standard repo operations, such as those undertaken in the LTROs in December and February, then the ECB is directly assuming risks which the Greek private deposit holder is no longer willing to hold. If the liquidity is injected via Emergency Lending Assistance, then the Bank of Greece is theoretically assuming the risk, rather than the ECB as a whole. But in the event of a euro break-up, these losses would ultimately fall on the ECB itself.”

See the dilemma here — at least from a German point-of-view? This silent bank run is seriously stacking risk upon risk onto the ECB balance sheet. Now, as long as the currency union stays together this isn’t really a problem. But if one of the links in the chain snaps, the ECB balance sheet takes a hit — a big hit.

Now, since the ECB issues its own currency this is not really a problem from an operational point-of-view. Central banks, after all, can never really go bankrupt. However, the Germans hate the idea that the ECB might allow its balance sheet to take significant losses.

So, what does all this mean? Well, it looks like the Greeks have just got a rather massive bargaining chip handed to them by the citizens of the periphery voting against the Germans by removing their deposits from peripheral banks. A classic case of subversive European democracy in action, it would seem!

Given this set of circumstances, if the Greeks are to exit it will be a major headache for the Germans and the ECB. And so it looks like Mr. Tsipras, who has recently come out talking eminent sense about what is going on in the Eurozone at the moment, is holding far more cards than many in Germany and Europe are likely to be comfortable with. And so the only people that are looking ring-fenced these days are Merkel and her political allies. Schadenfreude, much?

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. kris

    Right on the money.
    Right after MF Global in Nov 2011 I recommended to my friends in Greece and Italy as well as to few friends here in Toronto who have money in Greece and Italy to move the money from NBG and Unicredit to somewhere else. To my surprise, after my short presentations …. everybody did.
    Where to? Scotibank in Thessaloniki, Credit Suisse in Milan etc, thus within the system.
    So, depositors are safe, but the bank share holders or creditors (ECB) are screwed.

      1. kris

        Housing bubble is little to say. I was told it happened in 1982 when prices dropped 30% overnight.
        As to Scotibank, Canada does NOT have pure private banks. Those 5 big banks are government banks under private management, since by law they all have explicit back up by gov. We have only 5, that’s it.
        That’s the case right now with the US big 5. Gov owned banks under private management.

  2. F. Beard

    Haha! Pretty funny. So the ECB shoots itself in the foot by backing up private banks in the periphery but not the sovereign governments there?

  3. bmeisen

    Paulson figuratively put a gun in Bernanke’s nose, Tsipras can do the same to Monti.

  4. CM

    Wow, I’m showing my age – naturally the Simpsons’ bank run scene references Jimmy Stewart in Frank Capra’s _It’s a Wonderful Life_.

    1. Strategist

      In UK It’s a Wonderful Life is shown on the BBC on Christmas Eve every year. So I reckon Brits of many ages would know that the bank clerk was being James Stewart

  5. ajax

    Interesting post, Mr. Philip Pilkington.
    If it ever comes to resolving all these Greek debts in
    an equitable manner, as a result of Greek bargaining power,
    it will or would be very messy.

    The tax evasion phenomenon has been well covered in
    the media. Some press has been given to interest-rate
    swaps organised by Goldman Sachs for the Greek Government,
    or rather past governments, and some have asked the
    question: did the Greek officials know the risks?

    Then there are allegations of Greece spending beyond its
    means, say maybe for the 2004 Olympic games. If
    government officials are thought of as agents of the
    people, and Greek Olympic games organing committees
    as made up of agents of agents of the people, and
    these committee-members spent unwisely, it can always
    be seen as a principal-agent problem. But sorting out
    who did their due diligence, adequacy of disclosures
    and the rest could be very complicated, 8 years after
    the games.

    Greek bonds used to carry high risk-premiums, in some
    sense it’s a pity; but again, sorting out responsibility
    and what’s equitable or should be is again messy.

    Then, it can happen in some African countries that
    unscrupulous mining companies pay bribes to African
    elected officials to exploit some ore-rich region,
    or pay less mining rights to the government of the country where the ore is found, or to “lobby” for mine-friendly
    legislation. There are rumours of “odious debts” having
    been contracted through corrupt(?) Greek government

    I was surprized to learn that annual wage increases in
    Germany was 7% nominal for several years (after averaging), but 27% nominal for the whole Eurozone (this according
    to the film Debtocracy).

    The complexities in arriving at an “equitable
    arrangement” are enormous …

  6. vctr

    We would need the ECB and the European Commission to take over and recapitalize weak periphery banks, and force these to relocate to some core jurisdiction asap, in such a way that “host countries” would not be able to redenominate customer deposits into anything like new drachmas. This probably requires some currently non-existent legal framework that takes years to develop, but it just might help avoid the imminent periphery-wide bankrun, and cool down the situation once again for a while. Preferably all eurozone banks would of course be supervised by one single regulator.

    The problems of too low competitiveness and unsustainable levels of government debt in the periphery countries would of course still remain.

  7. Jim

    So, when Cisco was posting 40% annual revenue gains via vendor financed equipment, should it have continued extending such loans, or did it do the right thing by cutting off new credit lines and assuming the losses?

    JPMorgan is sitting on billions of derivative bets gone bad. Should it continue to double-down, hoping that eventually the market will see things as its strategist does? Or should it continue to unwind its bets as carefully as it can?

    The problem with Philip Pilkington’s argument is that it’s reckless. What happens when the Greeks and Spanish eventually leave the Eurozone and the Target2 is 3x what it is today?

    Do you double down again?

    1. Nathanael

      There’s no “doubling down” involved.

      The ECB can print money. In real terms it costs it nothing to print money right now. At the moment there’s a money shortage.

      Eventually the ECB will be forced to stop handing the printed money only to the very rich — because that’s unsustainable.

      However, you can continue to print money and hand it to the poor until you reach full employment, can’t extract raw materials, or have all your factories operating full out.

  8. Up the Ante

    Can it be, Mr. Pilkington, that the periphery citizens do not approve of banking fraud ? Yes, that f-word mentioned in relation to Europe’s finances.

    “.. the citizens of the periphery voting against the Germans by removing their deposits from peripheral banks. A classic case of subversive European democracy in action [contra banking fraud], it would seem! ”

    Pairing your observation with the Icelanders’ choice is a welcome sign.

  9. Knute Rife

    The central problem of the Eurozone is that it consists of sovereigns that do not issue their own currencies and a currency not issued by a sovereign. Consequently, the Zone lacks the budget flexibility of the US, UK, or Scandinavians. We have a series of MMT petri dishes developing before our eyes.

  10. someone

    They will be happy! Just to let post one Freak after another, doesn’t make it deeper, perhaps you can impress someone from Kentucky with it. Really, this Blog gets lunatic.
    Alles Nazis, ich verstehe noch nicht mal ihre Sprache, geschweige denn französisch. Aber ich kann die Welt erklären.

  11. pebird

    If Greece leaves/allowed to leave the EZ, the Euros will return. People and companies will need to pay their taxes (net of evasion) in Dracma 2.0, and they will use a combination of newly minted Dracma 2.0 spent into existence by the government, plus their repatriated Euros, buried deep in the EuroCore.

  12. Conscience of a Conservative

    Yes, a Greek bank run is quite rational. If you have savings, take them out of institutions where the gov’t can forcibly convert them to a lower valued currency, but the Germans do not want to subsidize Greeks, and the big elephant in the room is Spain. As bad as a Greek exit of the Euro will be staying in will be far worse. Exiting the Euro will mean devalued savings, and high inflation, but it will mean increased exports and growth, and the pain will be far shorter than staying in and seeing taxes rise and negative economic growth. After Greece leaves the Euro, vacationers will flock to Greece and exports of olive oil will surge(along with other exports).

  13. Laturb

    *€220 billion inflows in the last four weeks from ECB
    *30% of deposit accounts already cleared out
    *contagion spreading to PIIGS
    I’m cash only.
    No cheques accepted.

  14. snowedin

    not so fast there.
    The assumption is free flow of capital.
    Certainly I can imagine Germany and others instituting capital controls in order to manage the risk, in case (when) Greece/others exit the Euro. A simple reversion to resident and non-resident accounting. I really don’t think someone’s Euro is safe just because its in another country. If push comes to shove I don’t see why Germany wouldn’t.

  15. Fiver

    To portray Greeks, Spaniards, Portuguese, etc. as “voting against the Germans” by depositing their money in German banks is playing pretty fast and loose with the language. Can’t wait for how one might paint the apparent Irish determination to vote FOR austerity in a week’s time as an epic victory by Irish political hacks. Too bad a greater effort was not made by many Irish who’ve left the heavy lifting to the Greeks, French and even opposition Germans. The “No” side could’ve carried the day in Ireland with support from some of those who claim to care about the public interest, but never show up for the big ones. The momentum with an Irish “no” against undemocratic, Eurocratic edict would’ve sealed it. The current “deal” would be dead. It may well die in any case, but an expensive, lingering painful, death – really too bad the Irish won’t be able to claim they, too, took decisive action, when it would’ve meant so much.

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