Capital Flight Greek Banks Hemorrhaging Money

More than €100 billion in deposits has been withdrawn from Greek banks since the country's financial crisis broke out in 2009. There are fewer deposits in banks than loans – a dangerous situation for any bank.
Cash is leaving Greece faster than people.

As politicians in Brussels and Athens continue to wrangle over Greece's future in the euro zone, the situation is getting increasingly desperate for Greece's banks.

The liquidity position of Greek banks is getting more and more precarious. Due to the political uncertainty that has taken hold since the left-right government of Greek Prime Minister Alexis Tsipras came into office, and the fear of an impending national bankruptcy, retail banking customers and businesses are emptying their accounts.

More than €100 billion has now been withdrawn from Greek banks since the country first plunged into crisis in 2009. The capital flight has left banks with more than €70 billion more loans on their books than deposits in their accounts (see graphic).

The situation has only gotten worse over the last few months.

Since early parliamentary elections last December, when a victory by the radical leftist Syriza alliance of Mr. Tsipras began to seem likely, deposits in Greek banks held by private households and businesses have declined by almost €26 billion, or $28 billion.

The run on Greek banks reached a climax in January, when elections were held, with withdrawals of €12.2 billion. According to figures released by the European Central Bank, customers withdrew another €7.8 billion in February. Some €3 billion in funds were then withdrawn in March, say banking industry insiders.

This exodus has left Greek banks with total short-term and medium-term deposits of just only €137.4 billion today. By comparison, total deposits in December 2009, before the crisis began, amounted to €237 billion.

We are keeping a close watch on this liquidity. We are in daily contact with the supervisors and banks in Greece. Danièle Nouy, Europe's top banking supervisor

The surprisingly sharp increase in emergency loans to Greek banks provided by the European Central Bank is one indicator of the recent surge in capital flight. According to financial sources, the Frankfurt-based ECB increased the ceiling for emergency loans to Greece, through a program known as Emergency Liquidity Assistance, or ELA, from €69.8 to €71 billion last Wednesday. The central bank's guidelines only permit lending to banks that are fundamentally solvent and therefore financially healthy, but "with temporary liquidity problems."

Danièle Nouy, Europe's top banking supervisor as head of the European Central Bank's supervisory arm, insisted in an interview with Handelsblatt published Wednesday that Greece's banks remain solvent for the moment.

"Greece’s national supervisor has done a good job. The institutions are liquid and solvent. And we are keeping a close watch on this liquidity. We are in daily contact with the supervisors and banks in Greece," she said.

The ELA loans, which are handed out by the Greek central bank, have become the most important source of funding for Greek banks, which lack the collateral to draw from the ECB's more normal refinancing options. The emergency loans provided roughly corresponds to the outflow of capital from banks, according to financial industry insiders. Because of the tense situation, the ECB's governing council is now setting its ceiling for the ELA loans on a weekly basis.

Germany's central bank, the Bundesbank, has been especially critical of the ECB's actions, fearing that it could be giving Greece's politicians too much leeway and placing the central bank's own balance sheet at risk in the process.

The Greek government has been adamantly opposed to introducing capital controls to prevent money from fleeing the country.

"We will not become another Cyprus," said an official with the Greek finance ministry, alluding to the climax of the Cypriot financial crisis in March 2013, when banks remained closed for a week and then had to be recapitalized at the expense of shareholders and depositors. Most of the restrictions imposed on foreign transfers and withdrawals in Cyprus at the time have only recently been lifted.

Financial insiders suggest capital controls are not needed for the moment. They suspect that only about a quarter of the funds being withdrawn by customers are being transferred abroad, which is why the imposition of capital controls on foreign payment transactions would probably be relatively ineffective.

The Association of Greek Tourism Enterprises, SETE, has warned against the negative consequences of capital controls, arguing that such controls alienated tourists in Cyprus.

Nevertheless, the government could eventually be forced to introduce controls to prevent the banks from hemorrhaging more money. Retail banking customers are hording most of the cash they have withdrawn in recent months in safe deposit boxes or private safes, or are simply hiding it in their homes.

The fact that most of the money has stayed in the country leads bankers to hope that at least a portion of the withdrawn funds will be re-deposited into accounts once Greeks have regained confidence in their lawmakers and the country's future in the 19-nation euro currency zone.

At the moment, however, with Brussels and Athens still at loggerheads, there is no such confidence.

Because of the difficult economic situation, the proportion of loans that are in default – currently about 37 percent, according to banking industry estimates – could increase even further.

Already now, loans of almost €80 billion are no longer being serviced. In late February, the €137 billion in total deposits in Greek banks were offset by more than €213 billion in debt. To create some breathing room, major banks set aside more than €2.3 billion in reserves last year for loans they considered unrecoverable.

The government in Athens is also running out of cash, and in some ways undermining the position of their own banks.

Commercial banks are losing liquidity in part because the government is urging publicly held companies to invest their cash reserves in short-term government debt securities instead. Finance Minister Yanis Varoufakis hopes that this will make it possible to delay an impending default on payments.

In addition, entities like the Greek Manpower Employment Organization, the OAED, and the regional government of the province of Attica transferred about €200 million last week from commercial banks to accounts with the Greek central bank. Although this could give the government access to the funds, it also makes them unavailable to the Greek economy, which needs the money to obtain loans to stimulate growth.

 

Gerd Höhler is Handelsblatt's correspondent in Athens. Jan Mallien covers the European Central Bank and monetary policy for Handelsblatt in Frankfurt. To contact the authors: [email protected] and [email protected]