Greek Banks Were Closer to the Cliff Than We Knew

The Bank of Greece has published its monthly report on the financial position of Greek commercial banks as of the end of January, and it turns out their situation was much worse than we knew.

Greek banks lost €31b of funding during January, including €12.8b of deposits and €17b of foreign interbank credit. It was all replaced with freshly created euros lent into existence to Greek banks by the Greek national central bank. Bank of Greece credit to commercial banks shot up from €56b at the end of December to €87.5b at the end of January. As I wrote back on Feb. 8, the professional analysts who follow Greece were estimating at the time that BoG credit to banks was probably up to €70b-€75b.

What this means is that the Bank of Greece was rapidly approaching the limits on its lending to Greek banks, and thus Greek banks were rapidly running out of cash before Yanis Varoufakis met Mario Draghi in Frankfurt on Feb. 4. Draghi obviously knew that, and his reaction and that of other members of the European Central Bank Governing Council that he conference-called with after Varoufakis left now appears to have been very harsh indeed.

The council lowered the BoG’s lending limits, giving it very little room to continue keeping Greek banks liquid. This strongly confirms my interpretation that Draghi did not like what he heard in that meeting at all, and he and other European central bank governors felt it was their duty to limit the EU’s potential losses from what then seemed a probably imminent Greek default.

The council removed the BoG’s ability to accept Greek government bonds or government-guaranteed assets as collateral for standard ECB-backed lending to Greek banks, and then set a €59.5b limit on BoG emergency lending to Greek banks. By doing so, the ECB council essentially capped BoG lending at somewhere just under €100b, because Greek banks have less than €40b of other ECB-eligible collateral – mostly €37.7b of European Financial Stability Facility bonds received from their EU-financed bailout.

Moreover, some portion of those EFSF bonds were already pledged for private credit, which effectively lowered the sub-€100b cap further. Unwinding private secured loans to borrow from the BoG wouldn’t have generated any extra cash to pay fleeing depositors and interbank creditors.

And BoG had already lent €87.5b to Greek banks at the end of January. The ECB council seems to have given the BoG hardly any additional lending allowance, knowing full well the limits it was imposing meant the Greek banking system would run out of cash in about a week.

Only after the Greek government began to cave in and accept that it would have to endure more troika supervision of its fiscal policies did the ECB relent and make two small hikes to the limit, by €5.5b on Feb. 12 and another €3.3b on Feb. 18. The ECB was keeping Greece on the shortest leash possible by keeping its banks right on the edge of running out of cash the entire time the extension of Greece’s adjustment program was being negotiated.

Here are the gory details of Greek banks’ loss of funding in January. Besides the big headline numbers there are some intriguing details, such as the new deposits Greek banks attracted from outside Greece. Something tells me those were not given on especially favorable terms.

And here’s a table showing how the Eurosystem’s exposure to the Bank of Greece exploded in December and January as a result of the run on Greek banks, drawn from the BoG’s advance monthly balance sheet. These are the Bank of Greece’s liabilities for all of the euros it has put into circulation, either as banknotes or as central bank deposits. If Greece were to exit the euro and the Bank of Greece were to take its assets with it and deny any liabilities to the EU, the rest of the Eurosystem would have to back the euros the BoG has issued by injecting new assets.

Target liabilities are essentially euros created as reserve deposits by the Bank of Greece that left by interbank transfer to the rest of the Euro Area. Deposit liabilities are euros created as reserve deposits still in the possession of Greek banks. Liabilities for currency in circulation are the BoG’s proportional share of the Eurosystem’s liabilities to holders of currency in circulation. Liabilities for over-quota currency are the BoG’s liabilities to the Eurosystem for currency the BoG has issued into circulation in excess of its proportional share.

The latter figure won’t be reported till the BoG publishes a more detailed monthly balance sheet some weeks from now, but it can be estimated from the change in a catch-all “remaining liabilities” category in the advance data. The numbers in red italics are estimates, but probably very close to accurate.