by James Buchanan
Greece will almost certainly default on its payments to the European Central Bank on June 30th. You can’t turn around a nation’s economy overnight. A stable economy requires the production of goods that the rest of the world wants to buy. Greece made the mistake of creating too many government jobs, that paid too much and which allowed workers to retire early with substantial pensions. What’s especially compelling about the situation in Greece is that California and many other US states are following in their footsteps.
A Bloomberg news article reports ” Greece’s banks may need an injection of fresh emergency funds to operate Monday as people rushed to pull out money after Prime Minister Alexis Tsipras called a referendum that could decide his country’s fate in the euro.”
“Two senior Greek retail bank executives said as many as 500 of the country’s more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece. An official with Greece’s Capital Markets Commission, the markets’ regulator, also warned that the Athens Stock Exchange may be unable to operate on Monday without a cash injection into the banking system. A Greek central bank spokesman said it was making efforts to supply money.”
“The European Central Bank’s governing council was expected to hold a conference call on Sunday to review the banks’ liquidity condition, said a Greek official, who asked not to be named in line with policy. The Frankfurt-based central bank said in a twitter post that it’s closely monitoring developments and would review the situation ‘in due course.’”
“Some banks were placing limits in daily cash transactions. Yiota Kardogianni, a manager at a branch of Piraeus Bank SA, said cash withdrawals were limited at 3,000 euros ($3,350) daily and ATM withdrawals at 600 euros. Alpha Bank AE had set a daily limit of 5,000 euros for most of its branches since last week.”
There is serious fear in Greece that the government may decide to give every bank account a “haircut.” This means if you leave all your money in the bank, the government may decide to come along and steal 20 to 50 percent of your money from you.
The Greeks’ fear is not all irrational. The disaster in Cyprus is still fresh in everyone’s mind. One article notes “The banks started to fail once they had to admit to losses, as in forced to write off bad Greek loans. This caused a bank run and capital controls were put in place, violating the foundation of the Euro, that within the currency no capital controls shall be used.”
Initially Cyprus asked a sum of €17 Billion to bail out its government and banks. The plan by the EU Troika was to put a levy on Cypriot failing banks, which meant everyone must take a loss, including insured depositors, since the ECB wanted the loan to Cyprus government (who would give it to banks as bailout) to be secured. This did not go well since insured deposits are to be protected in accord with modern banking. Instead the Cypriot failing banks got nothing, while the Cyprus Government gets the €10 Billion bailout with harsh consequences.”
“Cyprus is only getting €10 Billion to bail out the Government, where €7.5 Billion of the €10 Billion will go to re-finance maturing bonds held with the ECB, all while the loan is provided by the ECB. This results to the ECB kicking the can down the road, for someone else to deal with in couple years. The financing for the banks has to be found elsewhere (taken from uninsured depositors).”
“The fact EU let the banks fail, along with EU Finance Minister’s comments that Cyprus is a template for rest of Europe, has scared depositors elsewhere in Europe…”
Of course, a bank can also fail if depositors make a run on the banks and take all their money out, which appears to be happening in Greece right now.
No one knows how much of a domino effect the situation in Greece may have on the rest of Europe. The minority subprime mortgage disaster of 2007 came as a surprise and plunged the world into a major recession, which some people argue we’re still in.