Friday, December 26, 2014

Greek Banks Lack Liquidity?

One of the major factors which is always cited when one asks why the Greek private sector (and particularly the export-oriented companies) does not grow more rapidly is the alleged lack of bank credit. At the same time, one cannot help but marvel when one sees how some banks use their liquidity. Let me just cite the 250 MEUR which Piraeus Bank invested in the Marfin Group.

Back in October, a number of negative news had started a bit of a run on Greek bonds: the yield increased from about 6% to about 9% in a very short time which means that there were more sellers than buyers. One would think that the buying/selling of Greek bonds is an offshore activity, i. e. some hedge funds want to sell while other hedge funds are still interested in buying. Not so last October.

The Bank of Greece reported that 1,7 BEUR left the country during October to buy Greek bonds from motivated sellers. The sellers presumably were mostly hedge funds. The buyers were mostly Greek banks. Had the Greek banks not bought the paper, the yield might even have increased further. But who would have cared? The market yields are relevant only if and when the country needs to make new borrowings at those rates. That not being the case for Greece, Greek bond yields are exclusively a matter for foreign buyers/sellers.

So why would Greek banks, who claim to be starved of the necessary liquidity to finance the real Greek economy, why would those banks spend so much liquidity on buying Greek bonds from foreign hedge funds? It's a bit of a naive question because any school kid knows that when you are borrowing from the ECB at about 1% and buying Greek bonds yielding about 9%, your interest margin is about 8%. And that is a margin a bank will never get from a private sector borrower.

The Finance Minister has now warned that, in case of a government crisis, Greece could not borrow from the Troika but, instead, would have to tap the domestic money market via T-bills in the first quarter of 2015. Amounts up to 4 BEUR have been mentioned. The Greek banking sector may not be adequately financing the real Greek economy but it certainly seems to be using a lot of liquidity for purposes which have little or no relation to growth of the real Greek economy.

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