“Ireland is not Greece” was one of the lines the Irish government used during the depth of the crisis. However, the kind of gradual “run” on the banking system now taking place in Greece, and the pressure this creates, has echoes of Ireland’s experience in late 2010. And, like Greece, Ireland had come to rely on the “ drug” of emergency liquidity assistance from the European central banking system and was reliant on ongoing approval of this funding from Frankfurt.
Greece’s banks have been losing deposits as customers take out their cash, raising speculation that special temporary controls to limit the amount that can be withdrawn might be necessary. Depositors are nervous, as they fear a Greek euro exit could see their savings transfer overnight into a new, more lowly valued, currency. Another risk depositors fear is a special levy on deposits to help recapitalise the banks, as happened in Cyprus, when it agreed a rescue package with Europe in 2013.
The outflow of deposits from the Greek banks has been significant, amounting to about €1 billion a day towards the end of last week and €2 billion over the weekend – similar daily levels to those seen in Ireland in September to November 2010 as international cash left, fearing for our national solvency.
Enormous advances
Like Ireland in end 2010, where some €140 billion had been extended to the banks directly from the ECB or via our own Central Bank, the amount now extended to Greek banks is enormous.
Emergency support to Greek banks – routed through the Greek central bank – has just been increased to a maximum of €88 billion and the total exposure of the European central banking system to Greek banks is well over €100 billion.
The most recent figures showed only €140 billion in deposits in the Greek banking system – down 15 per cent in recent months – so the level of ECB support is enormous and rising.
Under ECB rules, emergency assistance is normally approved every couple of weeks from Frankfurt, but this approval is now being done on a daily basis. The problem for Greece is that the ECB will need to see continued political progress in reaching a deal if more and more cash is to be extended. If the ECB judges that the Greek banks are insolvent, then it cannot extend cash to them under its rules and if Greece itself defaults, then the value of government bonds held by the banks is in question. It is a delicate dance, made more complicated by the fact that the Greek banks are running out of collateral – assets which they can pledge as security when drawing down emergency assistance. Reports say they have a maximum of €95 billion, leaving little headroom if withdrawals continue at the current rate.
Capital controls
One option is to impose capital controls, which are rules which limit the amount that can be taken out of the bank and the amount which can be transferred out of the country. And a big concern will be that even in the event of a deal being done the banks are now very weak and, unless a credible package is presented, depositors may be slow to return cash, fearing that a new crisis could lie around the corner.
Banking is all about confidence and the Greek banks have gradually lost the confidence of depositors and the market in recent months. As we saw here, it takes time for this confidence to return, meaning that even if a Greek deal is done allowing the government to meet its debt repayments, keeping their financial system afloat remains a key challenge.
