The crisis in Greece is deepening. What a difference a few months can make. Last year the country was able to tap the capital markets borrowing for three and five years paying interest of under five per cent.
Its four main banks had received a cleanish bill of health in the European Central Bank’s Asset Quality Review. The economy was recovering, boosted by strong tourism receipts and was about to show the first positive year of growth since the crisis hit .
But in the autumn increasing political uncertainty put a stop to that and the last quarter of 2014 saw a move back to recession. The 25 January elections with the radical left-wing party Syriza emerging as the largest party affected sentiment adversely and Greece is once again shut out of the capital markets.
Three-year bond yields are currently at 20 per cent, and 10-year ones at over 10 per cent. The lengthy and acrimonious negotiations with the Europeans over an extension of its bailout have not helped. Its banking system has been hit by vast withdrawals of funds as “Grexit” is mooted, with some €20bn of deposits having been withdrawn since early December.
The banks have had to ask for extra ELA support which has so far been granted by the ECB although it is keeping a more frequent review of the limit and no longer considers Greek government debt as good enough collateral for the banks.
It is also discouraging the banks from buying newly issued government treasury bills. There hasn’t exactly been a bank run yet but the Greek banks will be finding it harder to cope with what is an increasing percentage of non-performing loans. This was bad enough before the latest crisis, with some of them having to substantially increase bad debt provisions, as no “bad bank” has been created yet in Greece. On top of that both individuals and businesses are believed to have stopped servicing and paying back debts in the hope of a possible amnesty or improvement in terms of repayments now a Syriza led government has been voted in. With property prices falling the value of the collateral offered for many of the loans granted by Greek banks is declining, adding to the pressure.
And they will not benefit from extra liquidity themselves from QE as the Greek bonds they hold do not form part of ECB purchases at present under the €60bn monthly purchases. Though in a bail out arrangement Greece is still undergoing a “review” and therefore does not qualify under the scheme.
And the Greek state itself is running out of liquidity to carry out its day to day functions and to meet its maturing debt obligations. Tax revenues are collapsing with the shrinking economy. The government will soon have difficulty paying wages and pensions, let alone meeting other needs.
The €7.5bn due as last disbursement to Greece from the second bail-out agreed in 2012 is unlikely to be forthcoming for a couple of months at least once the review of its programme is completed.
Some €2bn debt repayments are due in the very short-term and up to €10bn over the next three months. So the latest idea is to borrow from the state employment insurance and other pension funds which indicates a high degree of desperation. The atmosphere has deteriorated, though not sufficiently yet to create wholesale panic. Yet there is talk of a possible need to impose capital controls and forcing “buy-ins” like in Cyprus which would cause big losses. Watch this space.