Monday, June 29, 2015

Greece: How Ugly Will It Get?

Greek bank insolvency may end up mooting the referendum. Things could get plenty ugly before Sunday.

At Wednesday’s governing council meeting, the ECB will discuss the legal status of the Emergency Liquidity Assistance program and various options for Greek banks. The worst case is not pretty. It would involve ECB forcing a "resolution" of the Greek banking system, which would ultimately lead to a "bail-in" of depositors (confiscation of funds), separation of non-performing loans into a bad bank, and various liquidation exercises meant to make the ECB (not the Greek people) whole. All of this would take time, of course; it's not going to happen in a week. Still, if the governing council comes back with bad news, it will cast a dark shadow over an already dreary situation.

There is effectively no deposit insurance. The Greek deposit insurance fund has a paltry 3 billion Euros in it, to protect something like 130 billion Euros of deposits. In Cyprus, in the 2012 crisis, the bail-in was aimed disproportionately at large depositors; but in Greece it won't matter. There's not enough "backstop" to protect even the smallest depositors. Everyone will get hurt. I've seen estimates from 50% to over 90% for the resulting haircuts.

Clearly, it's in the Eurozone's interest not to let something truly awful happen to Greek depositors, because a highly visible, traumatic doomsday play-out would almost certainly trigger bank runs in peripheral nations. But ECB's reputation for humanitarian solutions, at this point, falls a bit short, to put it mildly.

The "peripheral nation" problem is more insidious than it looks on the surface. Greek banks operate directly or indirectly throughout Bulgaria, Macedonia, Albania, Serbia, and Romania. Depositors in each of those countries could be affected if Greek banks are "resolved." (See this Reuters story for more.)

At an Athens supermarket: evidence of a run on food.
Even if ECB takes no draconian action on Wednesday, just getting the Greek banks to reopen while capital controls are in place will be complex and difficult. Meanwhile, if private (never mind public) payrolls can't be cleared through the (closed) banks, workers won't get paid and things could deteriorate rapidly. Shortages in fuel and basic commodities have already started to happen; by Sunday, people will be in no mood to vote for more chaos (by voting Οχι: No).

A lot depends on what happens between now and Sunday, obviously, but at the moment it seems ludicrous to imagine that people will vote anything but Yes on the referendum, because (Mr. Tsipras? Are you listening?) no one knows what Οχι leads to. Yes leads back to the main highway (the Highway to Hell, but still a highway). The main highway, horrible as it is, will be looking better and better as the days go by.

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