Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors.
As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.
“The point where collateral is exhausted is likely to be near,” JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote in a note to clients May 15. “Pressures on central government cash flow, pressures on the banking system, and the political timetable are all converging on late May-early June,” Bloomberg reported.
European policy makers are losing patience with Tsipras who said as recently as May 14 that he won’t compromise on any of his key demands. He’s planning to force a discussion of Greece at a summit of European Union leaders in Latvia that begins on May 21, a day after the European Central Bank’s Governing Council meets in Frankfurt.
Bonds Drop
Greek shares and bonds fell on Monday, with the benchmark Athens Stock Exchange dropping 1.4 percent at 1.28 p.m. local time. The ASE has fallen 26.3 percent in the past year, making it one of the worst performing primary equity indices tracked by Bloomberg. Yields on two-year Greek notes jumped 280 basis points to 23.71 percent, the highest level this month. Greek bonds remain the best-performing sovereign securities over the past month, according to Bloomberg’s World Bond Indexes.
While talks are centering on whether to give Greece more money, the ECB could decide to raise the stakes as soon as this week if it increases the discount on the collateral Greek banks pledge in exchange for cash under its Emergency Liquidity Assistance program.
Such a move might inadvertently prompt a further outflow of bank deposits and pressure Tsipras to choose between doing a deal and putting his country on the road to capital controls.
Liquidity Lifeline
The arithmetic goes as follows: Greek lenders have so far needed about 80 billion euros ($91 billion) under the ELA program.
Banks have enough collateral to stretch that lifeline to about 95 billion euros under the terms currently allowed by the ECB, a person familiar with the matter said. With the central bank raising the ELA by about 2 billion euros every week, that could take banks to the end of June.
A crunch will come if the ECB increases the haircut on Greek collateral to levels not seen since last year. That could be prompted by anything from a complete breakdown in talks to a missed debt payment, the official said. A continuation of the current impasse could even be all that’s needed, the official said.
An increased haircut would reduce the ELA limit to about 88 billion euros, the person said. While that gives banks about four weeks before hitting the buffers, the leeway is so limited that Greece might need to impose capital controls, limiting transactions such as ATM withdrawals, to conserve the cushion. Market News International first reported on the reduced ceiling on May 12.
“Since the great crisis of 2008, Europe has created many tools to control the flow of money and banks,” said Andreas Koutras, an analyst at In Touch Capital Markets in London. “Thus the crisis in Greece is more likely to be resolved through the tools of the ECB rather than” by political means.
Investors in Greek debt are showing few signs of panic for now, with the yield on the Greek 10-year bond having dropped about 3 percentage points from the 13.64 percent on April 21.
