€700 Million Withdrawn On Monday Alone

The WSJ reported late on Tuesday that  Greece's president Papoulias, following a conversation with the central bank governor noted that 'the strength of the banks is very weak right now' (sic), which is not only a somewhat odd way of putting it (the strength is weak?), but even if it had been formulated without the confusing combination of contradictory terms, would rank as the understatement of the year.

The correct phrase would have been: 'the banks remain technically insolvent and are becoming more so

 by the minute'. As we have reminded readers yesterday, the planned post PSI recapitalization of the Greek banking system has not yet taken place. So the banks are currently in a kind of limbo: they are still operating, but they are in reality only husks. Their deposit liabilities have so to speak become highly theoretical magnitudes from the point of view of depositors.

Similar to other bondholders, the banks have suffered a grievous haircut in the 'PSI' deal that cut about €100 billion from Greece's government debt (PSI stands for 'private sector involvement').

In the meantime the haircut has become  a great deal worse, as the new bonds are lately collapsing just as fast as the old ones did.

As was to be expected, the prospect of Greece being forced out of the euro area or perhaps the prospect of the bank recapitalization being held up by the political impasse has made at least some Greek depositors nervous.



This is the kind of picture that usually makes those administering a fractionally reserved banking system very nervous: a long line of depositors about to get their money out.

(Photo source: unknown – the Web)



According to the WSJ:


Greek depositors withdrew €700 million ($898 million) from local banks Monday, the country's president said, as he warned that the situation facing Greece's lenders was very difficult.

In a transcript of remarks by President Karolos Papoulias to Greek political leaders that was released Tuesday, Mr. Papoulias said that withdrawals plus buy orders received by Greek banks for German bunds totalled some €800 million.


Greek banks have seen a steady decline in deposits since the start of the country's debt crisis in 2009, which prompted depositors to withdraw cash and transfer funds to overseas banks.

In the past two years, deposit outflows have generally averaged between €2 billion and €3 billion per month, though in January they topped the €5 billion mark. The latest data from the Greece's central bank shows that total deposits held by domestic residents and companies stood at €165.36 billion in March.


(emphasis added)

At Monday's rate of withdrawals, it should take about 206 business days for the banks to be completely denuded of deposits, but these things often have a tendency to morph into outright panics, so an accelerated bank run can by no means be ruled out. Monday's pace of withdrawals obviously is already a marked acceleration from what was experienced previously.

However, the above calculation is very much hypothetical, as the banks are definitely not 100% reserved. On the contrary – in the euro area as a whole, only 5.4% of all extant demand deposits are actually backed by standard money (which is vault cash plus the cash reserves the banks hold at the central bank). The remainder of outstanding deposits are fiduciary media. As the name implies, this is money that depositors must 'trust' will be available to them on demand, even while they are – or at least should be – perfectly well aware that this can not be true for all depositors.

Under the no doubt generous assumption that Greece's commercial banks have a similar reserves/deposit ratio as the remainder of the euro area, this means that only €8.9 billion are available to pay to depositors. So the calculation actually looks a bit different: at Monday's pace of withdrawals, the banks will – theoretically – become unable to pay in in about ten days.

There is also the not unimportant matter that when customers withdraw cash from a fractionally reserved banking system, a 'reverse multiplier effect' sets in. Given the euro area's effective reserve ratio of 5.4%,  for every €1m in original deposits, an additional € 17.52 million in credit and deposits has been created ex nihilo.

If the 5.4% backing were the legal reserve requirement, then a net withdrawal of 15% of demand deposit money would in theory lead to a chain reaction that would make roughly 76.6% of the extant credit and the associated deposit liabilities disappear. In other words, this would be the extent to which the amount of outstanding fiduciary media would have to shrink in this case (assume that €1 million is the total amount of standard money originally deposited: then the total money supply would amount to €18.52 million. If depositors were to withdraw 15% of the deposit money, the credit expansion would have to be curtailed by roughly €14.181 million to a new total of € 4.339 million).

However, the required reserve ratio in the euro area is not 5.4% – it is only 1% (!). So the system is not 'fully loaned up', and can therefore withstand withdrawals to some extent before running into the problem of having to shrink outstanding credit. Moreover, the central bank as the 'lender of last resort' replaces funding from depositors with funding from the central bank (in Greece's case, via the 'ELA', or emergency liquidity assistance), so there are other ways of supporting the size of the credit and money supply in the face of a bank run.

Still, a bank run that gets out of hand will soon reveal the vulnerability of a fractionally reserved system, even one that is backstopped by a central bank and has not yet expanded fiduciary media to the full extent legally possible.


New Elections To Be Held In June



Famous Greek ruins in stormy weather – a metaphorical image.

(Photo source: unknown – the Web)



As German news magazine 'Der Spiegel' reports, the inevitable has happened and Greece is forced to hold another round of elections in June after the president failed in his last ditch attempt to forge a coalition government.


“It was the final act in the tragedy surrounding the attempts to form a Greek government — and it had a dramatic ending. Greece will hold a new election in June after politicians failed to form a government on Tuesday, nine days after a vote that produced a stalemate.

Athens now faces at least another month of political uncertainty that threatens to push Greece closer to bankruptcy and an exit from the euro.

After a third day of failed talks with political leaders, a spokesman for President Karolos Papoulias said the process of seeking a compromise had failed and a new vote must be held. Elections rules suggest it will be in mid-June, possibly June 17. A caretaker government is to be formed on Wednesday to lead the country until the new vote can be held.”


We won't reiterate the litany of possible problems this will bring, but very likely the widely expected failure to form a coalition government has played a role in the massive withdrawals from banks on Monday.



Via 'Der Spiegel': the size of the financial help extended to Greece, including the PSI write-off. Of course a large part of this usually flows right back to creditors shortly after it is disbursed – click chart for better resolution.



The Greek government's attempts to squeeze blood from turnips meanwhile continue to come to grief. As the Alphaville blog reports, the plan to tie new property taxes to electricity bills has simply led to people to no longer paying their electricity bills at all – instead of getting more money, the government had to pay money to the utility (the Public Power Corporation or PPC) to keep it running. The attempt to collect the levy has in the meantime been quietly dropped. As Alphaville notes:


“Ironically, the scale of non-payment means that the PPC itself has run out of money. Last month it needed a €250m liquidity injection from the government so as to avert a nation-wide energy supply meltdown. So even less of the already-too-small pot of tax revenues is going to the government. The PPC has until end of June to find new sources of funding. It seems unlikely that people who stopped paying power bills last year are suddenly going to start now.”


(emphasis added)

Soon, so Alphaville says, the government may resort to make payments in the form of  IOU's instead of euros,  so to speak in 'when issued drachma'.

Meanwhile, financial markets reacted with varying degrees of consternation to the latest developments. The Athens stock market not surprisingly fell to yet another new low, mainly due to a big plunge in back stocks:



The ATG's historic crash continues. Note that the bulk of the decline owed to a further decline in bank stocks – click chart for better resolution.



Credit and stock markets in the rest of Europe were not exactly happy either, as were 'risk' markets elsewhere. Wall Street notably weakened considerably after the story about the budding bank run in Greece broke.

Spain and Italy saw their bond yields and CDS spreads rise once again, with Spain's 10 year yield reaching nearly 6.35% and Italy's 5.19%. CDS spreads on both lurched higher with gusto as well, with Spain's reaching yet another new all time high. None of this is particularly comforting, especially Spain's situation is becoming dicier by the day. Many other CDS spreads in euro-land and the CEE nations also reached new highs for the move – even theoretically unrelated ones like CDS on JGB's moved to new interim highs. In short, correlations are once again becoming stronger, a typical sign of growing panic and liquidity stresses. Naturally Greek 10 year yields jumped higher once again as well, in a huge 190 basis points one day move. 


Credit Market Chart Selection

Below is a selection of our customary update of credit market charts, showing the most important CDS on sovereign debtors and banks, bond yields, euro basis swaps. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts.  Prices are as of Tuesday's close.



5 year CDS on Portugal, Italy, Greece and Spain – Spain at nearly 542 basis points is at a new all time high once again – click chart for better resolution.



5 year CDS on France, Belgium, Ireland and Japan – new highs for the move everywhere – click chart for better resolution.



5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – click chart for better resolution.



Three month, one year, three year and five year euro basis swaps – tiny bounces in longer dated ones, while the three month variety was lower – click chart for better resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – another 6.1 basis points were added to this index for a new high for the move – click chart for better resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – ugly, meet desperate. At 29.4% the new Greek bonds are soon going to be as distressed as the old ones were. In fact, considering their low coupon, they already are. Spain's yields are fast approaching the panic highs of November last year – click chart for better resolution.



Austria's 10 year government bond yield (green), Ireland's 9 year yield (white), UK gilts (yellow) and the Greek two year note yield (orange). Gilts and Austrian bonds are  profiting from strong 'safe haven' demand (which is frankly ridiculous…), while some of the speculative bid has come out of the new Greek 2 year note – its yield jumped by nearly 270 basis points on Tuesday – click chart for better resolution.



While we have omitted the charts of CDS on CEE nations and other smaller euro area member nations  from this update, they all show roughly similar jumps higher than those of the sovereign CDS depicted above. Once again the gaps that have opened up in the performance of the various contracts during the 'crisis pause' are closing – the contagion effect is palpable.


Addendum 1: Hollande Meets Merkel, First Attempt Sabotaged by Higher Power

Apparently the good Lord doesn't like socialists getting too close to his realm: he felled Mr. Hollande's plane en route to his meeting with Mrs. Merkel in Berlin by  hitting it with lightning:


“The plane could have been hit by lightning," a presidential spokesman told the AFP news agency. "For security reasons, it turned back. At this moment, the president is again en route." No-one on board was hurt.

BBC transport correspondent Richard Westcott says it is very common for planes to be hit by lightning: most pilots will experience two strikes a year, some many more.

Planes are designed to dispel the electricity out through the wingtips, our correspondent says, so that it is rare to have to turn back after a strike.”


Let's call it a warning shot.

Alas, they did manage to meet shortly thereafter and Bloomberg reports that this has 'yielded a growth signal for Greece', whatever that is supposed to mean. Have they waved the magic growth wand in Greece's general direction?

A snippet from Bloomberg's report indicates they did exactly that:


“German Chancellor Angela Merkel and French President Francois Hollande said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro.

Requests for measures to bolster growth will be “considered” and the European Union may also “approach Greece with proposals,” Merkel said late yesterday at a joint press conference with Hollande during his first official visit to Berlin. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Their encounter, the first meeting between the chiefs of Europe’s two biggest economies, came after Greece announced a return to the ballot box following the collapse of talks on forming a government. The euro and stocks fell as investors speculated that Greece may drop out of the single currency more than two years after its budget-deficit blowout triggered a financial crisis across Europe that continues to rage.

Hollande saw Merkel less than 12 hours after being sworn in as president and an arrival that was delayed by a lighting strike on his plane from Paris. With Greece in its fifth year of recession, the French Socialist returned to a theme he pressed throughout his election campaign, saying policy makers must offer the prospect of something more than austerity.

“I’ll respect the vote of the Greeks whatever it is,” Hollande said. “Yet my responsibility is to give Greece a signal. I see the suffering and challenges that the Greeks feel. The Greeks need to know we’ll come with growth measures that will allow them to stay in the euro zone.”


(emphasis added)

We have to give Hollande this: it does not happen very often that a eurocracy politician deigns to mention the suffering that has become the lot of so many people in Greece. If the sudden outbreak of signaling will actually help remains uncertain at this point.

Meanwhile, Mrs. Merkel had a somewhat different interpretation of the lightning strike:


“Merkel said she was “very glad” that Hollande came to Germany the day of his inauguration. “We are even more glad because he did this despite the lightning strike. Maybe this is good omen for cooperation.”


Other than that, Hollande reiterated his demand that the fiscal compact needs to be renegotiated, with ideas ranging from engaging in 'investment spending' to 'issuing joint euro area bonds' . Obviously it remains to be seen what the Germans will have to say about all that  when the time for negotiations comes. As we have noted previously, Hollande should worry more about structural reforms than ways to waste more money in an attempt to create another short-lived Potemkin village of unsustainable economic pseudo-activity.


Addendum 2: Update on the Whale Trade

We want to point readers to this very interesting article in the Guardian, which we found to have the most details on the actual nature of JP Morgan's 'whale trade' overseen by Bruno Iksil. Apparently he mostly traded a credit derivatives index on highly rated US corporate issuers – and like AIG did with CDS on mortgage backed securities, he became a huge seller of the contract. When US economic data began to sputter somewhat a few weeks ago, the trade started going against him. Given the constant need to post margin and the high value at risk of the position, the losses exploded in a very short time. Due to a sudden lack of liquidity it became impossible to get out of the trade. An interesting tidbit is that 40 bureaucrats from the Fed are ensconced within the bank, so the ties between banks and government are evidently going even deeper than hitherto thought.

In the meantime a veritable horde of bureaucrats has decided it needs to 'investigate' the trade, as though it were suddenly illegal for a trader to lose a big chunk of money. Hello? As far as we recall JP Morgan was among the few banks that did not require direct tax payer support in 2008/9, although the treasury practically forced all banks into accepting 'TARP' funds so as to avoid creating 'stigma' for certain banks. In any case, everybody apparently agrees that JPM weathered the 2008 crisis relatively well and didn't come crying for help. That it benefited greatly from the Fed's liquidity pumping exercises is another cup of tea – this holds for all banks after all. Anyway, nothing can hold the busybodies back now, who see a chance to justify their existence.

Naturally, Mr. Dimon's role as a member of the NY Fed is a conflict of interest of the first order, and although various bureaucracies and politicians insist the era of 'too big to fail' is over, one can not really be sure what is going to happen if push once again comes to shove. However, if no tax payer assistance is extended to a commercial bank, it should be free to make a losing trade now and then. After all, someone always loses in a derivatives transaction.

The latest agency to stick its nose into the proceedings is the FBI. Since when is it the FBI's job to investigate someone's trading losses? We also note that the episode has been grist for the mills of those who want to regulate anything that moves. We will comment on this aspect in more detail soon.



The CIO's trading revenues and Value at Risk over the past few years, via efinancialcareers.com – click chart for better resolution.





Charts by:  Bloomberg, bigcharts, Der Spiegel, Tricumen



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11 Responses to “Greece: New Elections Called and the Run on the Banks Intensifies”

  • mc:

    VaR is such a dangerous tool. If I am reading the graph correctly, this unit that generated $2-3B in losses over a very short time was running a VaR of only ~$110M. Looking at VaR for 1 day periods is a risk-management mistake for positions that cannot be liquidated in 1 day – clearly that is the issue with such large positions that they move the market like JPM’s London office. The 99% number is also very misleading, as it gives the risk manager the impression that the “worst case” loss is understood. However, understanding the max loss in 99% of the days tells you little about what happens in that 1%, and 1% events are not really worst case in frequency. It should be more precisely understood as a trade that will “blow up” 2.5 times a year on average (assuming 250 trading days/yr) and each time the losses will be greater than the VaR by an unknown and possibly large amount. The more that the losses deviate from a normal distribution (say for example, derivatives that can generate huge losses) the worse a measure VaR ends up being.

    • I agree and in this particular case they in addition altered their VaR model in such a way that it made their position look less risky than the old model would have done – so they added even more risk by using an allegedly ‘improved’ model.
      The idea that the market they traded in could become completely devoid of liquidity was apparently not even considered.

  • Cinquero:

    The “funny” side of capital flight out of Greece: if the new leftist government decides to unilaterally step back from their debt service duty, the rest of Europe can confiscate the capital which left Greece…

    If that really happens, the bets are off as to how fast and how high gold will rise.

  • juergenwahl:

    It would not surprise me if the assault upon M. Hollande’s aircraft were not a lightning strike at all, but some thuggishly inspired machination to bring his wayward views more in line with that of the Eurocratic elites. Events in Euroland are somewhat dicey right now, and the bully boys trying to stuff the cats back into the bag don’t need the BS of any freely elected Populist to kick bricks out of their crumbling edifice. Where big bucks are involved and times get rough, the rabble grow restive, and the tough had better play hardball – else the torch and pitchfork crowd will demand some unthinkable fair deal: such as economic growth for all versus austerity for the remnants of the working class.

    • Clearly ‘austerity’ as it is now practiced in the euro area is an entirely twisted application of the concept. It is definitely not about shrinking the State in any shape or form – most of it consists of extracting more tax money from the already battered populace. The State does not want to shrink at all -in fact, its relative size increases still more under these programs.
      However, whenever Hollande speaks of a ‘growth’ program, he thinks it is synonymous with even more government spending. He has not yet breathed a word about the kind of structural economic reform that would really be required if sustainable growth is to return.

  • Andyc:

    If Greece exits the EU can we finally conclude that they have FINALLY defaulted?

    Where does this put CDS on Greek debt?

    Will the EU announce that bondholders have taken a, “voluntary head shave” or a, “voluntary decapitation” this time, I mean after all whats left after haircut and then a head shaving?

    Ben will provide is my guess, its his turn to fill the punch bowl with QE3, at any rate I would not short the Euro just yet as its hard not to imagine another stick save in the works.

    : )

    • Amazingly the new Greek bonds are falling even faster than the old ones did. I guess this time the holders decided that waiting around for the next ‘haircut’ would make them look real stupid. :)
      I agree, it is Ben’s turn to provide. The ECB has already pumped in a trillion this year. Time for another one from the merry pranksters in Washington.

    • Andy, I doubt there are many CDS’s left on Greek debt. They declared a default on the old swaps and I don’t believe there are that many people or institutions willing to pay the premium or take the risk to pile right back in as is revealed by the 60% plus annual premium Pater has shown on the debt. Refusal to pay in Euros would in itself be a default. The bankers will get their pound of flesh. It might take a few decades.

      As far as the Morgan trade? This must be a huge position if it is merely swaps on a portfolio of US corporate debt. What would the move be, in either direction, 20 bp? That is a $1 trillion total position. I will add that if this is the position, it is well within the normal bounds of what a huge commercial bank does, as a swap is nothing more than a transfer of risk on a normal loan. Morgan could own the loan or they could own treasuries and own the risk on the loan, thus equating to owning the loan, allowing who owns the loan to transfer the risk and go about doing other business. To describe these as bets doesn’t do the process justice.

      The question has to be asked, why the outsized move in the price of these swaps? Are these junk bonds? If so, this is a clearly a risk on position and spreads on these debt instruments can move several percentage points. It appears Morgan is attempting to exit this trade or they would have never mentioned the losses, as the contracts, held to maturity, absent default would earn significant premiums and the reporting would fall to off balance sheet nonsense. This is a clear indicator that Morgan sees something coming that is much worse than the official version. The storm coming is potentially too large for Morgan to continue to hold such a position. I would be shocked if they haven’t moved off a significant amount of it.

      • worldend666:

        Perhaps it’s all misdirection and they are not long on bonds at all and they are in fact daring the market to take a position against them when no such position actually exists, and they are in fact placed 180 degrees from where they say they are.

        Really – who knows :)

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