Are Greek banks improving or struggling for liquidity?

Those who followed our analysis of the Greek bond buyback will remember that we warned at length that it could have some adverse effects, one of which would be to hit bank liquidity at a time when Greek banks could least afford it.

In the end Greek banks were pushed to take part by the government but their resistance (despite being reliant on the Greek Central Bank for liquidity and the eurozone for a recapitalisation) was quite telling.

In any case, data is now beginning to emerge which sheds some light on the issue but also provides plenty of questions (as always with Greece data releases are some months behind elsewhere so the latest data available is for January 2013).

Greek bank borrowing from the ECB and the Greek Central Bank (via ELA) has dropped significantly since the bond buyback at the start of December (down €21.3bn since November 2012).

 

Now, normally a sharp drop in borrowing from the ECB and ELA would be a positive thing since it suggests reduced reliance on official funding. However, in this case, we suspect that rather than improving their position, banks are actually struggling to find sufficient assets to post as collateral with the Bank of Greece to gain liquidity.

Other factors do support this argument. The Bank of Greece annual accounts show that the overall collateral pledged for central bank liquidity fell by €11.7bn in the aftermath of the bond buyback, while borrowing from the central banks fell by €7.5bn (data for January is not yet available). Furthermore, with total assets pledged for collateral still totalling €217.1bn or 50% of all bank assets in Greece it is easy to imagine that the banking sector is working under significant collateral constraints.

Are there any other potential explanations?

Well, the first would be that banks repaid their borrowings from the ECB’s Long Term Refinancing Operation (LTRO) in January. This seems very unlikely. The LTROs coincided with a period of extreme turmoil in the Greek banking sector due to the Greek debt restructuring, a period in which Greek banks could not access the ECB. Therefore, it is unlikely that Greek banks borrowed much if anything from the LTRO. Besides, if they did, it seems strange that they would give back a key source of long term funding early.

The second explanation could simply be that confidence has returned somewhat. There is some evidence to support this, not least the return of domestic deposits, which have increased by €12.1bn since November 2012. However, that still leaves a drop in central bank borrowing of €10bn which does not seem to have been filled by other sources of liquidity.

Lastly, the bank recapitalisation is being enacted, which could reduce the Greek bank demands for liquidity, although since it isn’t expected to be completed until end of April it would seem strange if the impact showed up this early on.

Overall then, there seems to be some strong evidence that the Greek bond buyback has hit the liquidity access of Greek banks, albeit not in a catastrophic way. More importantly though it has happened at a time when credit provided to the real economy continues to contract and economic growth remains some way off.

Update 16:30 13/03/13: 
@EfiEfthimiou has flagged up a good point over email. In December 2012 the ECB began accepting Greek government bonds as collateral again, this allowed banks to switch from using the more expensive ELA to standard ECB liquidity. The haircut on collateral may also be lower under standard ECB lending (we can't be certain since ELA terms are secret). This could have allowed the banks to reduce their liquidity needs and the level of collateral posted - another potential explanation then.

Greece-ing the wheels…?

It would be a gross understatement to say that negotiations on the Greek voluntary restructuring/write-down/bond swap have been dragging on a bit. The initial idea was first proposed and adopted last July and has been the topic of almost permanent negotiations ever since. Recent reports have suggested that a deal is ‘close’, with Greek officials expecting it to be tied up by the end of the month.

However, given the headlines over the last couple of days, we’re not sure how close ‘close’ really is. We’re referring specifically to all the talk of a retroactive introduction of collective action clauses (CACs).

Excuse the jargon, but this essentially means that the Greek government is considering passing a law which will introduce a clause into outstanding Greek bonds which stipulates that if a certain percentage of the bondholders (usually 75%) agree to a restructuring deal, the remaining holdouts will, by law, also be forced to accept the deal. Seems like a strange move if a deal is just around the corner, doesn’t it?

The aim seems to be that by introducing the CACs the Greek government can ensure a high participation rate in the restructuring, increasing the chances of Greece returning to debt sustainability. This sounds like a reasonable idea on the surface but it raises a huge number of questions given the previous negotiations:

- Invoking CACs would surely constitute a credit event, meaning the restructuring would no longer be ‘voluntary’, leading to the pay-out of credit default swaps. We’ve long been advocates of a forced restructuring in Greece, but this is something which the EU and Greece have been trying to avoid since these negotiations began – it seems a strange turn of events to say the least.

- It has been suggested by some officials that the CACs will be put in place but not invoked, simply used as a negotiating tool or threat. This seems rather long winded (and feeds the idea that a deal is not imminent) but we’re fairly sure announcing it in advance is a poor negotiating tactic, even by EU standards.

However, by our reckoning, the most important issue it raises is over the bonds held by the ECB. As we have noted before, the ECB is now the largest single holder of Greek debt, having purchased a reported €45bn in Greek debt under its Securities Markets Programme (SMP). Up until now the ECB has been able to stay out of the restructuring discussions since they have been conducted on an ad hoc basis (the ECB has continually asserted that it will be holding these bonds to maturity).

Legally, though, the ECB is not a senior creditor and has the same standing as all other bondholders. If the CACs were introduced and invoked they would surely impact the ECB bonds as well. We have previously estimated that such write-downs could cost the ECB €12bn - €18bn, while Barclays recently put the figure as high as €20bn. Not the end of the world for the ECB, but it would be a huge blow to its overall approach to the eurozone crisis (particularly in terms of German support). Furthermore, resisting these losses could be more detrimental to the eurozone since it would essentially mark the ECB as a senior creditor, creating huge distortions in bond markets as investors become wary of the increased prospect of being the first ones to take losses.

So, the discussion surrounding CACs definitely brings a new element to the Greek restructuring issue. It’s very suggestion runs contrary to the claims, which all eurozone leaders have been making, that a deal is close. However, if it is a signal that Greece has realised that a voluntary restructuring may not be workable or be enough to make Greek debt sustainable then it could be a welcome turn of events towards a hard restructuring. As we have argued numerous times before, a Greek default is now unavoidable and will only become more expensive the longer it is put off - i.e. the sooner this is accepted and dealt with the better.