Wednesday, January 25, 2012

Run on Greek banks

Deposits in Greek banks (not counting deposits from the central government) declined from 181 BN EUR to 178 BN EUR in November. At the beginning of the year, deposits had still amounted to 214 BN EUR. 

This translates into a decline of 36 BN EUR during the first 11 months of 2011!

Some of that money was transferred to offshore accounts; the rest was withdrawn in cash. Either way, that is a gigantic number! To put this number into perspective: the aggregate capital & reserves of Greek banks is around 45 BN EUR. Incidentally, the amount of deposits withdrawn since January 2010 is 64 BN EUR!

Normally, a banking system would have to close doors when confronted with that kind of a run. Not so in Greece because the ECB, as lender of last resort, replenishes with loans what depositors withdraw. In the theoretical long run, this would mean that the entire Greek banking system will at some point be funded by the ECB.

The bottom line is: any economy from which that amount of liquidity is withdrawn (mind you that the current account deficit withdrew another at least 20 BN EUR in 2011) has no chance of survival. If the free movement of capital and goods leads to those results, then those 2 freedoms must be constrained at least on a temporary basis.

To do: implement import taxes and capital controls!


  1. Herr Kastner, are you suggesting Papademos should do what Mahathir did for Malaysia in 1998, with the ECB playing the role for Greece that Saudi Arabia played for Malaysia.

    But experts like Hale and Courtis said Malaysia would end up as basket case state, but what would they know. Arguably Malaysia came out of the AFC faster than Singapore and South Korea, and certainly sooner than Thailand & Indonesia.

    But the idea of Europeans taking lessons from Asians, particularly Muslim Asians seems somewhat unlikely.

  2. TigerEyes, I am not competent to judge Malaysia/Saudi Arabia in 1998. I vaguely recall that Malaysia bet on Saudi Arabia not only as a source of funding but also as a new trade partner.

    I am not a defender of any economic models. I am more at the level of common sense and cash flows. Common sense tells me that Greece cannot go on for that much longer if her economy loses around 50 BN EUR of liquidity per year. No economy could.

    Below is a link where I describe in more detail what I mean.

    Greece has to stop destroying her economy and, once that is accomplished, start rebuilding it. That requires cash. So Greece not only needs the preserve the cash she has (savings) but do everything possible to get new cash. Preferably, the new cash should come as foreign investment or tourist Euros (instead of loans which need to be paid back). Thus, it wouldn't hurt Greece to find a new partner like Saudi Arabia who invests money in Greece and perhaps even sends some rich sheiks as tourists there.

    But before Greece gets new cash, she's got to take measures that the existing cash remains in the country!!!

  3. Certainly some of that money is leaving the country. But it would be interesting to know how much of it is going to pay everyday needs of the people. I can only speak for my family; my husband's salary (public sector) is currently 56% less than it was only a few months ago. We have had to withdraw money to survive. The money we had in savings has dwindled to crumbs between taxes, higher prices, lower income, and a particularly cold winter (we live in one of the coldest parts of the country). We are not trying to destroy the Greek banking system. We are trying not to go hungry while continuing to meet our financial obligations on time and in full. Thanks for another great article. I hope my uninformed opinions are not too silly for you!

    1. No, your opinions are not at all silly for me! I particularly liked your observation that there always has been anarchy between the Greek state and the Greek people. Hope you are right that one doesn’t need to worry about social peace in Greece.

      I think a country like Greece which is not 100%-structured, organized and/or transparent can have much more resilience in times of crisis than a “normal” country. That’s the good news. The not so good news is that the less an economy is transparent, the less one can influence it with policies. Take the income cuts which you mentioned.

      Yes, I have heard of income cuts starting at 30% and you now set the record with 56%. There is probably not another country which has ever done something like that to part of its people (not to all!!!). Since salaries/pensions are the largest expense category of the government, you would think that with such large cuts the government’s expenses would come down rapidly. Instead, they have come down by about 1% in 2011 (before interest expense). Where did the money go? No one in Greece has been able to explain this to me.

      Based on all the sensational stories how the Greek government wastes money, one would think that government expenses are out of whack. They aren’t! In Greece, they are about 50% of GDP (of a declining GDP!) whereas in Austria they are 53% and in France 56%. Now, would you have guessed that the Greek government spends less in relative terms than Austria and France? Perhaps these figures are not true (they do come from Eurostat!). But if they are true, to implement unnecessary cost-cutting measures in a time of recession is about the silliest thing one can do. Should one not do anything? Of course, not! The Greek government is definitely wasting huge amounts of money. So they should stop wasting and what they save redistribute to those who need it (instead of cutting it). I call that “Stop paying pensions to the dead so that you don’t have to take the money from the living!” The Troika won’t allow that? Maybe yes, maybe no, but the official responsibility for running the country rests with the government and not with the Troika. For reasons not understandable to me, the Greek government has from the start handed over its fate to the Troika. That’s not how it normally works in such situations.

      And now a personal example. Our second home is in Thessaloniki (my wife is Greek). For over 2 years I have now been hoping that things would get a little cheaper for us; but they aren’t getting cheaper. I see prices in restaurants which are at least as high as in Austria; same goes for Gran Masoutis. For a glass of Ouzo I pay anywhere between 5-10 Euros, depending where I go (and I don’t go to night clubs). The Cosmos Shopping Mall is definitely not “cheap”. Streets are packed with gas-guzzling SUVs; etc. Now I do know that the circles we move in are not the average Greece but still: I see a lot of people living the same way as before the crisis. Now to me that indicates that something is wrong. When a country goes through the kind of crisis Greece is going through, ALL citizens should feel that and not only the usual suspects who have salaries or pensions which one can tax/reduce, or the unemployed.

      So you think leaving the Eurozone would be handled more or less ok by the Greek population? I think most people would agree that if Greeks could live with a return to the Drachma, they should certainly do that. There will still be very significant adjustments to the standard of living but when such adjustments come through inflation/devaluation, they are not felt as directly as when they come through deflation and recession.

    2. Yes, -56% is a shock to us as well. My husband is a middle school teacher, now paid €594/month after income tax withholding, and that is for a tenured, experienced, full time teacher with a relevant masters degree (he made €1340 after taxes through September). He is in the second part of the "Moloch Party " - public sector hired on the basis of a national exam given every 6 years or so (he has no party affiliation) - but feels like a 'martyr.'

      There may certainly be teachers who are tired and burnt out after decades of teaching. There may be physics teachers and music teachers who were hired soley on the basis of belonging to PASOK - I don't know - but all the teachers I know were hired by taking extremely competitive national exams in their disciplines, which are blind to political affiliation. (We are in our 30s, and mostly socialize in our age group - I can't really speak for the older set.)

      As far as the issue of the government wasting money ('where has the money gone?'), I'm sure that like all governments, there is plenty of waste, but I'm not convinced it's of tragic proportions. We do see it, of course: my husband's students don't have textbooks, but that could have been solved if Greek schools reused textbooks over and over like American schools.)

      My impression (I could certainly be wrong) is that the government is running a medium-sized primary deficit (2.4% or so?) in a country that is expensive beyond all logical reason. The rest of that deficit is just interest on the loans, isn't it? If we could get our prices down to something reasonable, I see no reason why the primary deficit should exist at all - another reason the drachma is not as frightening to many of us as the media seems to think. Salaries may be the biggest expense, but they're still not *that* expensive. Our rent is low, but it's still our "biggest expense." That doesn't mean we should seek to reduce it necessarily, nor does it mean that it is necessarily higher than it should be. In fact, I see no reason why, in something like a school, the professionals charged with teaching children and running the school should NOT be the most expensive part of the equation. Without them, it's just a building filled with children and a bunch of desks, isn't it? (or hospitals without nurses and doctors, etc.)

      Things are not getting cheaper at all, are they? The only good deals are on non-essentials. That about says it all. I keep a detailed price notebook like any good noikokyra and have noted the price of flour has gone up six times in the past year - and this was a product not affected by the increase in VAT!

      I think that there are a lot of people making a lot of noise who would be minimally affected. Those of us who would be more affected have accepted that it is foolish to wait and see what will happen, and have been preparing as best we can. Whether that's stockpiling food, families moving back together, getting rid of cars they can't afford, renewing skills, planting a garden, returning to the village, or moving abroad, you'd have to be either very stupid or very brave to live in the Greece of 2010-2012 and not do anything to protect your family. I have tremendous faith that the Greek people are no more stupid and no more brave than anybody else.

    3. You are right about the primary deficit. According to the Troika-projections it should break-even this year and just yesterday I read an article by Nick Malkoutzis who says that's about to happen.

      But if you follow my blog, then you will know that my point is quite a different one. I am not saying that the budget deficit is irrelevant but in the grand scheme of things it is not the primary problem of Greece. The primary problem of the Greek economy, in my opinion, is that it needs funding from abroad to sustain a living standard. Without such funding, the living standard goes out the door. Let me explain.

      In 2008, Greece spent about 45 BN EUR more abroad than she earned abroad. That is a staggering figure by all measures! Spending more abroad means that receipts from exports and foreign services are 45 BN EUR less than what was paid for imports (current account deficit). From 2001-10, the cumulated current account deficit was 199 BN EUR!

      In 2011, and despite the great recession which cut down economic activity and therefore imports, Greece still spent 21 BN EUR more abroad than she earend abroad. Thus, just to be able to do that, Greece needed funding from abroad in that amount which funding came from the ECB. This current account deficit is a structural one; i. e. unlike the budget deficit which could be corrected overnight if the political will and support of the people were there, a structural current account deficit takes years if not an entire generation to be corrected (I don't believe Greece ever had a balanced current account in recent decades).

      Thus, we know 2 things: Greece needs funding from abroad to maintain some form of standard of living and, at the same time, that funding from abroad no longer wants to come to Greece voluntarily. This is the challenge.

      I argue that the only way to resolve this issue is through foreign investement. There may be other views but I haven't heard any. In fact, I am astonished that no one seems to pay attention what to me is the real problem of the Greek economy. Below are a couple of posts related to that but, as I said, this subject is what much of my blog is all about.