The humble Greek depositor, and the ECB

As the tear gas swirls in central Athens…

Euphemism du jour, from an S&P downgrade of Greek lenders:

We observe that domestic customers of Greek banks have demonstrated their sensitivity to signs of deterioration in the sovereign’s creditworthiness…

In fact, the whole statement is quite extraordinary for its singular focus on deposits. Standard & Poor’s analysts note that the flight of retail depositors “could conceivably continue to intensify”. Well yes. Half as many euros fell out of deposits from January to April as during the whole of last year (€13bn and €28bn). Frankly, it looks like an intensification is already here.

It isn’t just because of fear about the safety of the banks in a default (or indeed the value of euro deposits if Greece leaves the currency). Obviously, the entire Greek economy is burning through cash reserves as joblessness rises. So it’s not clear how much of this Greek depositor cash is going abroad, either into other deposits or real assets.

But whatever has caused the depositor flight, it’s odd that not many are making the connections to Greek bank funding at the European Central Bank. Having fewer deposits to draw on, the only other place Greek banks can go for replacement funding is from the ECB. That means pledging more, not less, Greek government-backed collateral.

So, what are we to make of the ECB’s repeated threats to cut off the collateral’s eligibility if the Bank is prevented from dictating terms on a bond rollover?

Of course it’s entirely within the Bank’s purview to do this. It’s not a lender of last resort to insolvent banks. But equally it’s not in a central bank’s purview to stop a sovereign debt restructuring and certainly no official throughout the eurozone is realistically able to control the deterioration of Greek deposits and credit.

Wake up and smell that tear gas, nos amis.

Related links:
Cyprus, from haven to contagion – FT Alphaville
The ECB goes all-in – FT Alphaville
The horror… the horror… – FT Alphaville

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