With capital
controls already imposed on Greece, some have wondered if this is as bad as it
gets. Unfortunately, as the Cyprus "template" has already shown us,
for Greece the nightmare on Eurozone
street is just beginning.
As a reminder, over the past few months
there have been recurring rumors that as part of its strong-arming tactics the ECB may
eventually move to raise the haircuts the Bank of Greece is required to apply
to assets pledged by Greek banks as collateral for ELA. The idea is to ensure
the haircuts are representative of both the deteriorating condition of Greece's
banking sector and the decreased likelihood that Athens will reach a deal with
its creditors.
Flashback to April when, on the heels
of a decree by the Greek government that mandated the sweep of “excess” cash
balances from local governments to the Bank of Greece’s coffers, Bloomberg reported that the ECB was considering three options for haircuts
on ELA collateral posted by Greek banks. “Haircuts could be returned to the level of late last year, before the
ECB eased its Greek collateral requirements; set at 75 percent; or set at 90
percent,” Bloomberg wrote, adding that “the latter two options could be applied
if Greece is in an ‘orderly default’ under a formal ECB program or a
‘disorderly default.’”
While it’s too early to say just how
“orderly” Greece’s default will ultimately be, default they just did if only to
the IMF (for now), in the process ending their eligibility under the bailout
program and ending any obligation by the European Central Bank to maintain its
ELA or its current haircut on Greek collateral, meaning the ECB will once again
reconsider their treatment of assets pledged for ELA and as FT reported earlier today, Mario Draghi may look to tighten the screws as early as tomorrow:
When the Eurozone’s central bankers meet in
Frankfurt on Wednesday, they could make a decision which some officials fear
could push one or more of Greece’s largest banks over the edge.
The European Central
Bank’s governing council is poised to impose tougher haircuts on the collateral
Greek lenders place in exchange for the emergency loans. If the haircuts are
tough enough, it could leave banks struggling to access vital funding.
The ECB on Sunday imposed an €89bn ceiling for
so-called emergency liquidity assistance, effectively putting the Greek banking
system into hibernation. If, to reflect
the increased risk of default, the ECB now applied bigger discounts to the
Greek government bonds and government-backed assets which lenders use as
collateral, that could leave banks struggling to roll over those emergency
overnight loans.
Some on its policy-making governing council feel
that Athens’ exit from a programme — notwithstanding its 11th-hour request for
an extension and third bailout — leaves the ECB with little choice but to take
actions that would, in effect, cut the Bank of Greece’s emergency support to
Greek lenders.
Some
eurozone officials fear that the position at Greece’s biggest lenders is so
tight the ECB could be in danger of pushing some weaker banks over the edge if
tougher haircuts are imposed.
Recall that in mid-June, Greek banks were said to have had as much as €32
billion in ELA eligible collateral that served as a buffer going forward. Since
then, the ELA cap has been lifted by around €5 billion, meaning that a generous
estimate (and we say "generous" because according to JPM, Greek banks
ran out of ELA collateral weeks ago) puts the buffer at a little more than €25
billion.
As the haircut rises, that buffer
disappears and once the discount applied to the collateral reaches a certain
level, an implied depositor haircut materializes. Why? Because by simple
balance sheet rules, assets must match liabilities (leaving a token €0.01 for
shareholder equity) and once the haircuts eat through the collateral buffer,
the implied value of Greece's pledged assets (currently at around €125 billion)
will quickly fall below the value of Greek banks' unsecured liabilities which
sit at around (but really under) €120 billion as of the date capital controls
were imposed in Greece over the weekend. These liabilities are better known as "deposits."
At that point, a depositor haircut is
required.
Although the collateral haircuts aren't
public, the face value of pledged collateral is (it can be found on the BoG's
balance sheet) as is the ELA cap, meaning it's possible to estimate the current
haircut and, starting with the assumption that a generous €25 billion buffer
remained as of the ECB's Sunday freeze of the ELA
ceiling at €89 billion, project the implied depositor bail-in for different
collateral haircut assumptions.
Here is the summary sensitivity analysis
indicating what a specific ELA haircut translates to in terms of deposit
haircut.
Another way of showing this dynamic is
presenting the ELA haircut on the X-axis and the corresponding deposit haircut
on the Y-axis once the critical "haircut" threshold of 60% in ELA
haircuts is crossed.
As can be seen raising the haircut to 75%
implies a €33 billion (or 37%) depositor bail-in or "haircut", while
raising the haircut to 90% implies a €67 billion (or 55%) hit.
Note that the latter scenario looks quite
familiar to what happened in Cyprus, and indeed that's not at all surprising
because if, as Dijsselbloem himself said, Cyrpus is a "template", then the next
step after capital controls is a depositor bail-in.
And while we wish we could have some good
news for the Greek population, this outcome may have been preordained by none
other than Goldman whose Hugh Pill, who on June 28 suggested the following:
The core constituency of the current Greek
government -- pensioners and public employees -- has enjoyed the first claim on
remaining government cash reserves. Only when those cash reserves are exhausted
will that constituency face the direct implications of the liquidity squeeze
the political impasse between Greece and its creditors has created. And only
then will the alignment of domestic political interests within Greece change to
allow a way forward.
And as Goldman's former employee and current
head of the ECB is about to have his way, the pensioners and public employees
will be the first to suffer - first with capital controls and then with ever
increasing haircuts on their deposits.
In other words, in order for the Troika to
finally achieve its goal of either forcing Tsipras to relent or inflicting
enough pain on Syriza's "core constituency of pensioners and public sector
employees" to compel them to drive the PM from office, after capital
controls come the depositor haircuts, first small, then ever greater until
Greece collectively Cries Uncle and begs Europe to take it back while
presenting Merkel with Tsipras and Varoufakis' heads on a proverbial (and
metaphorical, we hope) silver platter.
http://www.zerohedge.com/news/2015-06-30/greeks-nightmare-just-beginning-here-come-depositor-haircuts
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