Some potentially positive news for Greek banks, for once, and some possible embarrassment for financial blog Zero Hedge on Wednesday.
Harvinder Sian, head of European rates at RBS, is taking the excitable blog to task for its Tuesday story about Greek nationals pulling money out of local banks.
Here’s the note in full:
Greek deposit run?
The Greek rumour mill today centres on risks for the banking sector. The website Zero Hedge carries a rather hysterical story that “Greeks Scramble To Pull Out €8 Billion From Local Banks As Greece Responds With Money Control Measures”.
The central point of the article is that private bank customers have pulled €8bn out of Greece in a combination bank accounts, stock sales, property sales and other sources. It then asserts (wrongly, see below) that this is a ‘plain vanilla run on the bank’.
Let’s walk through it . . .
IS THIS TRUE?
The quotes attributed to private bankers (€8bn outflow etc) are not sourced but that is usually the case. We have heard of some ship owners for instance moving assets to Cyprus and Switzerland too, so this part of the story is not far fetched. The key point however is not the health of banks here but that the money and asset transfers are A MOVE TO AVOID HIGHER TAXES.
There are also some outright basic errors in the article’s calculations, with for instance the author making a link between the €8bn outflow being worth a total €400bn outflow ‘given fractional reserve banking’. For one, the €8bn also includes monies not in deposits. Second, the money multiplier is given in textbooks as the inverse of the reserve ratio, which is 2% in Europe. That means a €1 increase in base money creates €50 once this is loaned/re-deposited etc, and that’s where Zero Hedge gets its number. Using this undergraduate textbook formula is however incorrect. That much should be obvious by the fact that Greek banking sector total domestic lending is €195bn, and Greek 2009 nominal GDP is €238 bn. The money multiplier is running nearer 2x based on EMU M1 at present and for wider measures is closer to zero.
IMPLICATIONS FOR BANKS FROM THIS MONEY/ASSET MOVE?
Very little. Let’s start off by saying that Greece has a sovereign debt problem that is hitting the banks. The banks themselves started the crisis in fairly robust condition and to date there is absolutely NO EVIDENCE OF A DEPOSITER RUN.
The attachment for example shows the deposit base of the Greek banks has been rising in line with French deposits (different scales obviously) and the latest data for Dec-09 shows that Greek private sector deposits are at an all time high of €244bn. We’ll continue to monitor the data but our people on the ground say there is no sense of bank depo risk as we saw at various times with the UK and Ireland. Moreover, with Greece increasingly coming under the stewardship and umbrella of the EU and EMU, this is risk is probably diminishing.
WHAT IF
Let’s not kick the guys at Zero Hedge too far. It is useful to think about tail risks. In this case what would happen if risks to the banking system materialised? European action would prop up the system. On this matter we are near certain, especially because Greece is under the EU/EMU umbrella given the endorsement of fiscal measures from the EC and Eurogroup, but also for the common good.
Consider the situation of May 1931 when Austria’s major bank, Credit Anstalt was shown to be bankrupt. The bank’s deposit base was so large that it could not be frozen (capital controls) as it would have destroyed the Austrian economy. The Austrian government therefore and logically guaranteed the deposits, just as Ireland did in Sep-2008. In 1931, this was inconsistent with gold-standard discipline and saw a capital flight that ultimately spread the depression to Europe and bought down the large European powers, all from a country of less than 10m at the time (Greece has a population of 10.7mn as of 2009). Economic historians say a sizable international loan to Austria’s central bank would have allowed it to prop up its banking system.
At that time the international community could not get its act together in providing Austria with assistance, with French politics the main barrier (the premiership of Pierre Laval) insisting on the end of the Austrian-German customs union. (The customs union was widely seen in France as a prelude to Anschluss.)
Today, if you believe the media reports and occasional wire headlines, then Germany is playing the national interest card that France played in 1931. Nothing could be further from the truth. Back then imperial power games were motivation. This time around the common interest of the Euro and financial linkages means that support measures do VERY likely exists already. Moreover, as long as Greece plays ball on austerity and reform as it is suggesting – and despite the token strike efforts by local trade unions – then any action will be in the name of EMU solidarity and be sold as a hit against speculators.
Our key investment points remain: If you run an indexed EGB portfolio, then switching out of periphery into Greece at these levels is a no brainer as a default here means that most other periphery paper will eventually be worth next to nothing too. In trading terms, it is a little more nuanced. Spreads are currently at default/sudden stop risk levels and we expect performance firstly in CDS. GGB performance will be inhibited by €30bn supply by end May, but can perform thereafter to 200/225 bp in 10y versus Bunds. If the next auction does not go well then Greece will be forced into the arms of European financing with IMF style conditions attached. At that stage Greece has no other option but to render its sovereignty even more to Brussels.
Tee hee.
Ahem. For the record, as always, this is the house where FT Alphaville lives.
Related links:
`Italy’s worse and Germany stole our gold’ – FT Alphaville
Fitch cuts ratings of top Greek banks – FT
Bank Grεεkery – FT Alphaville