Nothing will happen with Greece this weekend

As you are aware, the situation in Greece is not getting any better. This chart shows the evolution of Greek bank deposits over time,


This is ugly: deposits have fallen substantially since November when I had my discussion (here) with David Einhorn about Piraeus bank. This should add substantial funding pressure for the banks. Obviously, it is out of question to “grow your loan book” in such an environment.

One of the arguments we had been about the cost of funds, here is what David had to say,

(…) The 2.04% is the cost of new time deposits in August 2014. This is not the average cost of deposits in the Q2 2014 financial reports, which was 2.62% according to the same presentation (and 2.71% in Greece time deposits). This cost will reduce down to the new cost of deposits over the 1-2 quarter duration of the time deposits. So even without any additional lowering of deposit pricing you would still expect to see a near 60bps improvement. This is obviously very material given there are €29.6bn of time deposits (the rates are also coming down on savings and sight deposits but this is much less relevant). The 60bps is worth close to €200m of additional annualised PPI, compared with the €1.2bn annualised reported PPI in Q2 2014. How low can deposit rates go? Time will tell of course but rates in the other periphery are around 1% and the management teams of the Greek banks are clearly trying to reduce them towards this level. I would suspect another 50bps (…)

So the average cost of new deposits was 2.04 percent in August 2014. Out of curiosity I looked up deposit rates Piraeus bank currently offers clients who want to open an account (here).

And what do I see?

Rates range from 0-1.4 percent – lower than in August 2014!! (I note that they offer a multitude of complex products, presumably to con their clients akin to mobile companies).

To sum up: a substantial drop in supply (of deposits) has not caused any increase in the price of funding. Given that the balance sheet of the Bank is more or less unchanged, we can rule out a commensurate drop in demand (for funding).

Do we need to rewrite economic theory? Is this some puzzle, something which has an unorthodox answer? Maybe rates stay low because there is a lack of profitable investments in the Greek economy? Maybe it is inflation expectations?


Rates are low because Piraeus bank does not have to bother about funding. There is a (very) large market player who does not make economic decisions and happily supplies any amount of funds needed. Market participants have an expression for that: dumb money. You know who I am talking about,


Deposit rates in Greece are low because the ECB (technically the Greek central bank) provides any amount of funds needed. There is no need for Greek banks to attract funds or keep costumers.

Now, the interesting thing is that any day that passes with deposit outflows (and higher ECB credit lines) the negotiating position of Varoufakis and Tsipras (who have made ludicrous promises to the electorate) improves. Why, that’s what I wrote in another post in February (here),

(…) Or take the ECB. A write-off would finally make it clear that it has engaged in government financing, although explicitly forbidden by EU contracts. This certainly would mean the end of the fiscal union debate. As someone who is tired to see government economists and “quality” newspapers argue for that nonsense, I would highly welcome such a development – even if I am aware that it would lead to a big economic and political crisis. (I confess that am a fan of the German proverb: “Besser ein Ende mit Schrecken, als Schrecken ohne Ende!”)

And this is exactly the reason why a write-off will never happen, as long as extend and pretend works. The accounting of government is opaque for a purpose. It has never been otherwise. If you do not believe me, read this book, it will cure you of any illusions you might have (…)

That’s right, even though the Eurocrats certainly dislike the two Marxist lunatics who make fools out of them, and even though the Greek economy (or the fate of ordinary Greeks) do not matter at all to them, they try to avoid a (formal) default at all costs, otherwise there is a rude awakening in the electorate in the core countries. And the costs are increasing by the day…


Although many predict this weekend could bring capital controls and the like in Greece, I do not think anything will happen. Instead, we will see further extend and pretend. Do not forget that a default would come at a very inopportune time now that the (of course independent) EU top court has decided that the purchase of government bonds is not government financing (here). This is probably a bold statement given current headlines, but I will stick to it.

Let me be clear: I am NOT predicting this can or will go on forever, or that the parties involved can “solve” the Greek problem. Surely, at some future point in time some kind of shock will occur, I just do not feel it is time yet. And aren’t market crashes more likely to happen in autumn anyway?



  1. Great post– I agree that more extend and pretend is the likely outcome.

    For what it’s worth, the Bank of Greece claims an agreement is close: “Despite the heated rhetoric, the central bank said that the two sides appeared to have reached a compromise on the main conditions attached to an aid agreement, and that little ground remained to be covered for a deal to stick.”

    1. @ youngmoney
      Thank you. I enjoy reading your blog, but somehow have problems with the commenting function. So take my compliments this way…

      It will be interesting to see what trigger ends this pose and when…

  2. So many people, myself included, have written about Target2 and yet, the debate about it is still on. Perhaps you could share your views about Frances Coppola’s analysis of Target2 (on which I have commented):

    I have a vague memory of times where one of the concerns of banks’ top managements was to always have enough of a liquidity reserve (eligible collateral for Central Bank refinancing) “just in case”. I don’t think the financial world has ever seen anything like what is happening in Greece today (and since 2010). Bank deposits have gone from almost 260 BEUR to now under 130 BEUR — and everything seems fine. I agree with you that the ECB will do everything to avoid being the trigger of a breakdown of the Greek banking system.

    There is one thing, though, which could cause trouble and that is physical cash. The ECB may provide unlimited funding but if Greek banks were to run out of physical cash, I think panic would break out and then there wouldn’t be enough planes to fly sufficient physical cash to Greece.

  3. @ Klaus
    I glanced at the Coppola piece and it is difficult to comment briefly on it since she makes good points, but also says a lot of nonsense.
    I think your comments/thoughts on this subject are absolutely legitimate.

    As you point out, in bancruptcy there is a big difference between the consolidated and the unconsolidated view (of the ECB balance sheet), a difference which is only execerbated by the fact that there is NO historic precedent for such a bancruptcy.
    Her statement that Euro debt will stay Euro debt even after an exit and hence Sinn should not worry too much does not answer anything, because it is nor performing debt, but debt of a “bancrupt” entitiy and it wil need to be restructured, i.e. it is definitely not worth par and somebody/something will have to take a loss.
    Questions such as seniority, repayment capacity of the lender (much more difficult to determine for a sovereign than for a corporate for various reasons) need to be adressed…You know how complicated this can get…
    Of course, the fact that politicians and their bureaucratis mainly guided by “public opinion” will be the driving seat virtually guarantees a messy, if not violent affair…

    Further, she seems to think that Target 2 is somehow inconsequential because it arises endogenously as a result of money transfers within the Eurosystem. And transfrers are always good (and harmless) because they “prove” there is the free movement of “capital” and goods…
    This is naive: tell this to a central banker who has tried to defend a peg in view of capital flight, i.e. “harmless money transfers”…

    Target 2 is a form of debt (I think she agrees with this although I am not sure) and its existence matters and has an impact on affairs (otherwise it would not exist in the first place).
    This can be easily seen by asking the following question:
    What do you think would have happened to the Greek banking system had it not had access to Euro funding (the result of which is ELA or Target 2)?

    (The difference between ELA and Target 2 is only technical, the latter arising from endogenous transfers and the forme from explicit lending decisions, but the economic substance is the same, i.e. the provision of EUR purchasing power via a involuntary (from the taxpayer viewpoint) debt transaction…)

    It would have gone bancrupt a long time ago, just as banks in Argentina went bancrupt, i.e. converted their USD deposits into a worse currency.
    Clearly, the fact that the banks are members of the Eurosystem (and the fact that the rules have been loosened as to what is acceptable collateral) makes a BIG difference in the (short term) outcome.
    In the long term, the harm for Greece willl probably be even higher than for Argentina…

    Greeks could NOT use their deposits to pay for German or Italian goods, or to transfer them to other banks, IF their central bank WERE NOT a member of the Eurosystem, simply because its banking system lacks the liquid hard currency reserves necessary to that.
    Sinn is probably right to claim that Target 2 results from a design error since nobody had thought about that before…
    Not so with ELA: this is an explicit (political) decision taken by lowering collateral standards….

    You can always lower Target 2 balances by increasing ELA, but you cannot lower your overal foreign indebtness to the “institutions” without returning deposits, i.e. private holders who are willing to take the credit risk, or paying them back from surpluses (out of question for ANY government)…

    1. @viennacapitalist

      Excellent post and riposte, as usual. The submarine lending that is ELA/Target 2 is a handy tool for ECB/Eurocrats to support the Greek financial system under the radar of broad news coverage and public opinion. If/when that liquidity tap is turned off we will finally have the chickens come home to roost.


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