Monday, May 21, 2012

Greece bank runs may really take off between now and june 17th - meanwhile , if Spain and Italy really have a comparable bank run as seen in Greece , Ireland or Portugal , we're talking more than two hundred billion euros leaving both countries !

http://ftalphaville.ft.com/blog/2012/05/22/1009991/the-not-so-creeping-process-of-de-euroisation/


The not-so-creeping process of de-euroisation

Posted by David Keohane on May 22 09:05.
The de-euroisation continues and is, in Italy at least, getting faster… these charts show foreigners running away from Italian liabilities in March at their fastest pace ever, and illustrate just how quickly the LTRO sheen has faded.
Italy’s March balance of payments, out on Monday, showed its biggest ever decline in portfolio liabilities and while Italian repatriation flows show no consistent sign of slowing they are not keeping up with the foreign pull-out from Italian portfolio instruments.
Source: Deutsche Bank
In their haste to divest, foreigners sold some €38bn of medium and long-term Italian bonds in March, bringing the cumulative foreign liquidation of Italian assets to €150bn since July 2011.
From Deutsche Bank’s Alan Ruskin (with our emphasis):
The data largely confirms what we have seen from the Target 2 data – that €268bn in LTRO borrowings (at the end  of April) are making up for the net long-term capital outflow as Italian debt increasingly becomes domestically held.  Italian Target 2 balances jumped €76bn to EUR 270bn in March and a further €9bn in April.
On the Italian portfolio account, the positive post LTRO glow lasted for only one month, with January the only month to record positive portfolio inflows since June 2011.   We do not have Spanish data for March yet, but Spain has not had positive foreign portfolio inflows since Feb last year.   Much more encouraging, France recorded sizable net portfolio inflows in February and March.  It is not likely that the Italian pullback is French repatriation, as France recorded only moderate portfolio repatriation of EUR 7.7bn in March.
Combine that with French balance of payments figures released last week, which show that foreigners bought a net €27.7bn of French assets in March, up from €18.8bn the previous month, and a picture of a one way flow remains hard to escape.
and.....


http://www.zerohedge.com/news/forget-bazookas-here-come-tomahawks-and-howitzers-r-rated-walk-thru-greek-endgame


Forget The "Bazookas": Here Come The "Tomahawks" And "Howitzers" - An R-Rated Walk Thru The Greek Endgame

Tyler Durden's picture
Submitted by Tyler Durden on 05/21/2012 17:01 -0400




We have already provided much cold, hard, clinical facts on the hypothetical Greek EMU exit on countless occasions before. Yet Jefferies' David Zervos has done it with such peculiar aplomb which we have not encountered before, that we felt compelled to share with it readers. Zervos' Paulsonesque 'apocalyptic' flair shines particularly when analyzing what happens at T-0, i.e., June 16, i.e., the day before Greek election day, i.e., the last Greek free call option on physical euros if all hell breaks loose: "On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros." So where does the chaos from a Greek bank run and exit lead us, as Zervos puts it. "The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play.The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firinghowitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!"
Of course, owning fiat-based assets in a system that is about to be drowned in what effectively amounts to infinitely more fiat, makes one wonder: what will be the point owning risk if the "currency" in which risk is denominated becomes meaningless virtually overnight?
Which is why we are happy to paraphrase Zervos: "And you best be owning somehard, real assets when those bad boys are launched."
Extracted from Jefferies' David Zervos:No ELA, No Euros! The End!
So lets "run" through the mechanics of a Greek bank run. As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account.
Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!
Now we have to look at the conditions under which the ELA could be turned off by the ECB. Looking back to the Irish case, it was the potential for a default on senior bank debt that triggered the ECB threats to the central bank of Ireland. As the rules stand, ELA lending can only be done to "sound" institutions. So the ECB in theory can shut down all lending, including ELA, if the NCB is failing to abide by the rules. And clearly, Irish banks that default on senior debt are easily proven NOT sound!
In the case of Greece, in the middle of a bank run, will it be hard to prove that banks are not sound? Hardly! But more importantly, the soundness of the Greek banks is 100 percent dependent on the 65b Euro capital injection coming as a part of the previous government's agreement to the MoU (Memorandum of Understanding, or what Tsipras calls the Memorandum of Barbarity).
That 65b is the ONLY reason why Greek banks have a chance of being deemed sound. Without the 65b, there is no way anyone could claim the BoG is lending to sound institutions and there is no way the ECB could continue to authorize the BoG to lend under ELA.
And that takes us squarely to Mr Tsipras, SYRIZA, the MoU/MoB and the Greek election. It will be very easy for Merkel and company up north to lay out a case for an ELA shut down for the BoG if the MoU is discarded by the Greek voters via a win for Tsipras! In a sense, Merkel's phone call on Friday to the Greek president was just that. It was actually the same call that was made to the Irish president a while back - and of course the Irish balked, caving to the German demands. At that time however there wasn't an Irish presidential vote. This time, with Greece, Merkel's message is really to the Greek people. And what is that message exactly? Vote for Tsipras and I turn off the Euros. Or, in other words, choosing Tsipras means choosing to leave the Eurozone. Of course, Greece could vote for Tsipras, discard the MoU, repudiate the dni8ceebt (including Target2 debts), still use the Euro and stay in the EU - but they would become Montenegro! The chances of that however are zero. The Greeks will want to print and control their destiny if they get cut off. No ELA will almost surely bring back the Drachma. And doing so would, in Merkel's view, be the choice of the Greek people. At least that's how it will be sold to the rest of Europe.
The problem for Merkel is that the Greeks will understand this and run the banks BEFORE June 17th - it is happening right now. On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros. If she gives the directive to shut off the ELA early she will at least keep the Target2 losses to 150b. And she will be telling the Greek people that if they vote for Tsipras, their Euros in the bank will not be available. This is a dangerous game for sure! But this way she can also blame the Greek voters for an exit, and hide behind ECB rules that imply access to funding can only be done to sound institutions. With this strategy she can have the Greeks decide on the 17th to keep the MoU, get the 65b and have access to their 150b Euros OR abandon the MoU, watch their Euros turn to Drachmas and leave the Eurozone. She didn't kick them out, they chose to leave!! Of course the few weeks leading up to the election with ELA turned off and a multi week Greek bank holiday would make for some crazy headlines.
As I said in Friday's piece, deciding what to do with the ELA for the BoG as we head into the Greek election "is the most important decision in the history of EMU". By turning it off, Merkel might scare the Greek people into complying, as she did with the Irish. By leaving it on, she makes it much easier for the Greeks to vote Tsipras and leave the rest of the zone to pay. She also makes it much more likely she will have to cave to Tsipras' demands.
The stakes are high, and while the decision is crucial for Greece, and their creditors, there are even bigger second order issues in play. A Greek run will certainly cause the Spanish and Italian folks to question the access of their respective NCBs to ECB funding and the ELA. It will be VERY hard to argue that Italian banks are sound if 100s of billions in deposits flow to Germany! And why wouldn't every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?
The Germans have tried to play hard ball for 3 years. Every time it backfires and the Fed and ECB have to ride to the rescue with bazookas. My money is on the Germans going to battle with Tsipras. And in the end we create a Greek exit and a bank run throughout the periphery. The endgame looks like what I described in the commentary entitled "Angie ain't it time we said goodbye". In that analysis the Italians and the Spaniards, through the chaos of bank run and Greek default, force the Germans to wrap their debts via Eurobond or some sort of system wide European bank deposit scheme. In actuality, the Rajoys and Tremontis of the world may even try to incite a run in Greece - it gets them the German wrap they have always dreamed of! Using Greece as a pawn in the big Eurobond chess game is dangerous, but likely effective!
So where does the chaos from a Greek bank run and exit lead us. The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!

and looking at how things could play out , this underlines why greeks should clean out their bank account promptly because once things start to roll , it could move quickly....

http://www.businessinsider.com/how-greece-leaves-the-euro-in-8-incredible-simple-steps-2012-5


One of our favorite regular reads is the The Long Run, the Short Run and the In-Between-note from Jefferies' Sean Darby, which (we think) comes out once a week.
Darby's latest has a very nice, idiot's version of how Greece would leave the Euro and re-Drachmatize the economy.
It's as simple as this...
1. The authorities declare ‘force majeure’ and default on their external debt. 

2. Immediately, all existing bank deposits are ‘frozen’. A bank holiday is declared in
which only limited amounts of money may be withdrawn from the domestic banking
system. 

3. Capital controls are imposed and the vast majority of banks are nationalized or taken
under government control. Foreign transfers of money out of the country are
restricted. 

4. A new currency is announced and all existing bank deposits are re-denominated in
the new currency at a devalued rate of say around 50% to 60% (or enough to bring
the country theoretically into a current account surplus). 

5. The new currency is allowed to float. 

6. All existing debts and claims are redenominated in the new currency: both
government and private sector. Wages, pensions and benefits are paid in the new
currency. 

7. The old currency is phased out as the official medium of exchange within the
country’s border
8. All local prices are posted in the new exchange rate. There is no reference to the old or other exchange rate such as the US dollar within the economy



and issuing funny money won't help with confidence....

http://ftalphaville.ft.com/blog/2012/05/21/1009041/greek-funny-money-redux/



Greek funny money, redux

Posted by Joseph Cotterill on May 21 17:42.
First it was John Dizard arguing that Greece could issue scrip and have this circulate as “money” during a funding stand-off with the Troika — without getting chucked out of the eurozone.
There are precedents that vaguely resemble this kind of stopgap approach: rememberpatacónes?…
(There’s more parts to it: As John adds, the Troika could keep up payments on Greek bonds via escrow account. Indeed we’d add that May’s payment of funds established this precedent. The Troika could also recap Greek banks without financing the Greek state directly. The ECB meanwhile keeps them liquid.)
Anyway, now it’s the turn of Deutsche Bank’s Thomas Mayer to think about the practical possibility of Greece issuing scrip. Or as he’s called it, Geuros.
Excuse the length – it’s interesting stuff, especially as Mayer moves on to bank deposits:
The Geuro would probably quickly be used in most domestic transactions. For the purchase of essential imports, Geuros would have to be exchanged against euros, most likely at a hefty discount of 50% or more. Since an increasing number of domestic goods, services and wages would be paid in devalued Geuros, the export sector could reduce its prices in euro and regain competitiveness against foreign suppliers.
The exchange rate of the Geuro relative to the euro would be determined by the primary budget gap of the government that is being filled by Geuro issuance. Political pressure could build for more prudent policies as Greek residents saw their terms of trade decline.
Following the recent restructuring of government debt, the Greek banks have lost almost all of their equity capital. Write-offs on loans extended to private households and companies now receiving primarily devalued Geuros would increase the capital shortfall.

To avoid a collapse with devastating consequences for the real economy, the banks would likely need to be moved into a European “Bad Bank” and re-capitalised with claims on the EFSF. Since they would now be under European administration, deposits with them would be safe (hence a new Greek government would be unlikely to resist such a move).

Hence, customers who fled into euro banknotes before stabilization of the banks could now safely re-deposit their cash. Seeing that Greek depositors have been saved, anxious bank customers in other countries could regain confidence and leave their deposits with their banks.
The European Bad Bank for Greek banks might then form the nucleus of a European “banking union”, including bank supervision, bank restructuring and resolution, and deposit insurance at the euro area level. It is now widely recognized that such a “banking union” is probably a necessary ingredient for a stable architecture of EMU.
One thing Mayer seems to be getting at here is that Greek depositors are more worried about their deposits staying denominated in euros than in the banks in which those deposits are found. Ergo, move deposit protection to where there are definitely euros. See Gavyn Davies on that.
Mayer says it would be up to the Greek government to “stabilise” the exchange rate through closing the primary budget deficit, thus removing the need to print Geuros. Once it did that (and bought back existing Geuros with euros) it would no longer be halfway out the eurozone.
It’s all very clever.
But one question we have is about the ordinary Greek reception to receiving IOUs from the government instead of social security payments and so on. In fact, ordinary people probably already have an idea of how a widespread IOU system would work, because of the prevalence in Greece of using post-dated cheques to do business. Firms before the crisis often pledged post-dated cheques to borrow cash. It’s less prevalent now — during the credit crunch — than it was, because obviously these systems need trust to work.
So who trusts the Greek government now? And how might Geuro paper avoid counterfeiting problems as well?
This isn’t saying IOUs would be out of the question; in fact we’re pointing out that a model already exists. But how stable would this fairly complicated arrangement be in the long term when Greece continually needs short-term primary deficit financing?
Although that, of course, might be the very point the Troika would be trying to make.


http://www.zerohedge.com/news/elephant-room-european-capital-outflows-and-another-%E2%82%AC215-billion-spanish-deposit-flight


The Elephant In The Room: European Capital (Out)flows And Another €215 Billion In Spanish Deposit Flight



Tyler Durden's picture
Submitted by Tyler Durden on 05/21/2012 15:19 -0400






Frequent readers know that Citi's Matt King is our favorite analyst from the bailed out firm. Which is why we read his latest just released piece with great interest. And unfortunately for our European readers, if King is right, things in Europe are going to get far worse, before they get better, if at all. Because while one may speculate about political jawboning, the intricacies of summit backstabbing, and other generic nonsense, the one most important topic as discussed lately, is that terminal event that any financial system suffers just before it implodes or is bailed out: full scale bank runs. It is here where King's observations, himself a member of a TBTF bank which would likely be dragged down in any cash outflow avalanche, are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows." That's right: according to Citi there is a distinct likelihood that, all else equal, the domestic bank sector in Spain will see another €215 billion in deposit outflows.

And while Greece has seen a slow and steady bank run over the past 3 years, which has made it far more palatable for the local financial system, King believes that the days of "slow" outflows are now over: "we think the risks are skewed towards larger outflows occurring considerably more rapidly." Now we won't read too much into this, but following up on Jim Cramer's Meet The Press interview from Sunday in which he explicitly predicted bank runs in Europe absent substantial and urgent policy changes, it appears that from a taboo, it has suddenly become all too cool to predict rapid and violent bank deposit flight in any but the priced to perfection scenario. Hopefully Spain is hip with all this sudden "coolness"...

Before we get into the punchline of King's note, here is a terrific summary of all the less than pleasant capital flows out of Europe's periphery.


And now back to the punchline, the first of which is King's all too spot on definition of a "bond vigilante" as not a "wolf" but a "sheep":

The trouble, as we see it, is that bondholders are not at heart the wolf pack Swedish Finance Minister Anders Borg famously made them out to be. Sheep, or perhaps wildebeest, would be a more accurate description.

Bondholders and depositors alike have only limited upside, but lots of downside. They therefore tend to graze quietly upon their coupons or interest payments, relying on others – such as the rating agencies – to warn them of oncoming fundamental risks. Even if individual investors are often very sophisticated, they are constrained by those who set their benchmarks and risk guidelines, which tend to be much slower moving.

... A sheep, however, which once it starts running, gets the herd moving very, very fast:

Once the flock has been disturbed, though, it can run quite quickly. And once it has changed its mind about a given risk, it can be almost impossible to get it to turn back. Those dropping Spain and Italy from their benchmarks, shifting their mandates towards AAA-only, or moving deposits away from peripherals, are very unlikely to return in a hurry. If anything, we think the risk is of acceleration. And it would seem that, having been disturbed once or twice already, investors are proving more alert to potential signs of danger in Spain and Italy than they were in Greece, Ireland and Portugal. Although the threshold for domestic capital flight looks to be higher than that for a retrenchment by foreigners, there is every sign that foreigners are pulling back already.

Which means what in practical terms? Nothing good if you are a Spanish bank, already on the verge of nationalization:

How far is the flock likely to run? In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks (Figure 18).The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy (Figure 19).



Although large, if these flows occur slowly enough, they might not represent a major problem. After all, Portugal’s banks have managed to replace fleeing foreign deposits with domestic ones, and ECB repo should allow a further ramp-up in banks’ holdings of government bonds.

But we think the risks are skewed towards larger outflows occurring considerably more rapidly. Admittedly there are a great many unknowns, including the potential policy response. But none of these estimates allow for the possibility of domestic deposit flight. In the case of a Greek exit from the euro, that outcome seems highly likely. Nor is there any sign that the flight from Ireland and Portugal is diminishing (if anything, we expect the opposite).11 Moreover, banks’ appetite to buy further government bonds may prove limited if they start to suffer deposit flight – and all the more so if they suspect that deposit flight stems in part from their holdings of government bonds
The rest is superfluous: once the run (either bond or bank) starts, there is no stopping it:
Above all, though, we think capital flight, like so much in markets, is a self-reinforcing process. Provided other depositors and bondholders are grazing quietly, there is no reason to run. But as risks come ever more into the spotlight – whether through the TARGET2 imbalances, benchmark shifts or the threat of EMU exit in Greece – the unattractiveness of the risk-reward becomes ever more obvious.
What is the only possible outcome that will prevent this virtually catastrophic outcome?
To our minds, capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough... Quite simply, investors in ‘safe assets’ need to be reasonably sure they will get their money back. Foreign investors in peripherals can no longer be sure of that.
In a continent in which the leaders of the countries can not agree on the summit lunch menu, let along on coordinated and forceful policy intervention, we certainly don't blame said foreign investors.
 
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