When Fearmongering Goes Bad: Greece Scrambles To Prevent Deposit Run Goldman Warned About In Its “Worst Case”

When Fearmongering Goes Bad: Greece Scrambles To Prevent Deposit Run Goldman Warned About In Its “Worst Case” (ZeroHedge, Dec 29, 2014):

Earlier today we got a classic, if rare, example of what happens when bankers bluff with a 2-7 off suit… and the people call it.

Recall that just over two weeks ago, none other than Greek currency swap expert Goldman (alongside Jean-Claude Juncker who quite explicitly warned Greeks not “to vote wrong“) came out with a fire and brimstone worst-case scenario for Greece, which was nothing but an attempt at fearmongering designed to scare Greek MPs into doing Samaras’ bidding, in which it said not electing the designated presidential candidate may lead to a worst-case scenario which involves a “Cyprus-style prolonged bank holiday.”

For those who have forgotten, these were the salient points from Goldman:

In the event that the parliament fails to elect a president, general elections would be held and market uncertainty/pressures would extend. At this stage it is important to understand that market pressures are not linked to the democratic process of elections nor to a potential government change, whatever the ensuing government formation may be. They are linked to the risk of policy discontinuity and a severe clash between Greece and international lenders. More specifically, we think the room for Greece to meaningfully backtrack from the reforms that have already been implemented is very limited. Any such attempt would lead to an interruption of official financing to Greece.

Examining the downside scenario.

To be sure, even in the event of a government change, there is room for a cooperative solution between Greece and Europe. Greece has made significant reform progress between 2012 and the gap between what has already been implemented and what remains to be done is not insurmountable.

Also, the incentives for a clash are not there. For instance any Greek government would likely want to capitalize on the momentum that the economy is building on the activity front, rather than trigger a disruptive capital flight that would lead Greece to a double–dip recession. In addition, given that more than 80% of Greek debt is held by the official sector and given that any OSI would be feasible only as part of an agreement with the Euro-area, there is an incentive for a Greek government to pursue cooperative solutions.

However, the history of the Euro-area crisis has shown that the probability of an “accident” can never be dismissed, when it comes to intra-EMU politics. And it is important for markets to be able to understand and quantify the aspects of a potential downside scenario, where official financing to Greece is interrupted.

The Biggest Risk is an Interruption of the Funding of Greek Banks by The ECB.

Pressing as the government refinancing schedule may look on the surface, it is unlikely to become a real issue as long as the ECB stands behind the Greek banking system. In fact, refinancing became a lot more pressing between 2011 and 2012. But financing needs were met despite the impasse in negotiations between Greece and international lenders – partly via the issuance of T-bills repoable at the ECB by Greek banks. Such methods can always be revisited at times of extreme need.

But herein lies the main risk for Greece. The economy needs the only lender of last resort to the banking system to maintain ample provision of liquidity. And this is not just because banks may require resources to help reduce future refinancing risks for the sovereign. But also because banks are already reliant on government issued or government guaranteed securities to maintain the current levels of liquidity constant.

And this risk can become more pressing from a timing perspective. At the heat of the Greek crisis, there was evident deposit and broader capital flight, which Greek banks helped accommodate with ECB’s help via the ELA facility. In the event of a severe Greek government clash with international lenders, interruption of liquidity provision to Greek banks by the ECB could potentially even lead to a Cyprus-style prolonged “bank holiday”. And market fears for potential Euro-exit risks could rise at that point.

Stripping all the political correctness, what Goldman said is that unless Greece quickly folds back in line and does as unelected Brussels eurocrats demand, there may well be a Cyprus-style bank closure coupled with preemptied bank runs.

Oops. Because if that was the doubled-down bluff, then Greece just called it, and the “downside scenario” is now in play.

Which means Greece now has to scramble to avoid precisely what Goldman warned would happen if the Greeks dared to put their (meagre) savings at risk. And, case in point, here is the Greek finance minister rushing to squash the next steps, which – as Goldman so conveniently explained – involve potential bank runs, a potential bank holiday, and potential Cyprusing of the financial system, only this time it is not Russian oligarchs who are most exposed – they have learned their lessons by now – by ordinary Greeks.

Here is Newsbomb.gr with what is sure to be an amusing backtracking on all the fearmongering that had been unleashed previously.

The government has guaranteed that bank accounts are safe and legislated deposit safeguards in the event of a shakeup ahead of Monday’s parliamentary election for Greek president, Finance Minister Gikas Hardouvelis said in an interview on Sunday’s Vima.

Hardouvelis was speaking ahead of the third and last attempt by this Parliament to elect a Greek president that will held on Monday, December 29. Failure to elect one
“We are preparing to withstand any rolling and pitching. We have already passed laws safeguarding bank deposits, and are in constant touch with our EU fellow-members, while the whole government will be on alert and vigilant,” Hardouvelis said.

Hardouvelis said that Greece must continue “to the next stage, which will be based on our growth plan, under our own initiative, without coercion by the troika of Greece’s lenders.”

Speaking of “bank deposits, which are safe,” he said his ministry had “taken care this past week and legislated the option of the Hellenic Financial Stability Fund’s to lend money to the Hellenic Deposit and Investment Guarantee Fund if it needs greater reserves than those available to support depositors.”

Asked whether he thought that a new government might be elected with a stance hostile to the memorandum, the finance minister replied, “The key to avoid tossing and turning and our economy’s future in 2015 and later is held by the European Central Bank… This key can easily and abruptly be used to block funding to banks and therefore strangle the Greek economy in no time at all.”

Actually no.

The ECB’s hands are tied right now, because the last thing Mario Draghi can do is proceed with open monetization of peripheral bonds (which would have to be purchased in any ECB public QE alongside all other Eurozone bonds) at a time when Greece can pull the rug from under the ECB’s already massive holdings of Greek public debt, and enforce a haircut which would impair the ECB’s balance sheet, in the process costing Mario Draghi his job and a handing the victory to the “sound money” Bundesbank on a silver platter.

Worse, should Greece decide to default it would means those several hundred billion Greek bonds currently held in official accounts would go from par to worthless overnight, leading to massive unaccounted for impairments on Europe’s pristine balance sheets, which also confirms that Greece once again has all the negotiating leverage.

So with the ECB out of the picture, and with the ball in Greece’s court, it actually makes the situation that much more unstable, and indeed could be just the precursor to the “Cyprus-style bank holiday” that Goldman warned about.

How credible will this warning be in practical terms over the next month as Greece prepares for a historic election? Keep an eye on those lines in front of ATMs, because unlike Cyprus, at least the Greeks still have access to Euros. The question is will they pull out enough Euros before their only currency option in front of the ATM is New Drachmas?


1 thought on “When Fearmongering Goes Bad: Greece Scrambles To Prevent Deposit Run Goldman Warned About In Its “Worst Case””

  1. When fear mongering gets bad? Greece has been in deep trouble for years, and they have made no secret of it. When the EU was formed, based on Napoleon’s Continental System, they forbore to use forensic accountants to check the finances of each nation that joined. They just went with the numbers given them by each nation. Inspired to become a large economic unit instead of a group of small nations with minimum economic power, they grabbed all the members they could get…….the devil is ALWAYS in the details……which they ignored until it was too late.

    Today, the EU is made up of 28 nations in varied forms of connection. The UK kept their own currency, and others are nonvoting members. They wanted to be a world economic power and they jumped too quickly. Of the 28 members, Greece, Italy, Cyprus, Belgium, Ireland, Italy, Spain, Portugal and even our friend, the UK, are in deep financial trouble.

    Enron Accounting was exported by Moodys to the rest of the world, and too many nations used it.

    BRICS has emerged as the world’s strongest economic power; regardless of US propaganda, their members are strong. China is the weakest link, but the blueprints for technology given them by greedy corporations in exchange for 25 years of slave labor is of value to the Eastern Bloc. The business China will have with the 75% of world economies connected with BRICS will help them rebuild.

    BRICS has put up a large fund equal to E100 billion to loan to small countries that want to avoid future US financial domination. It is but a matter of time before one or more of those countries take BRICS up on their offer. Once they do, others will follow, and the US dollar, kept afloat by EU support, will collapse.

    One of the condition of the IMF loans says once a country borrows from them, they can go nowhere else for more money. It is an absurd condition, and it will eventually be ignored. What can the IMF do? Call the loans? What earthly good will that do? Calling loans on nations that cannot pay will only show the IMF’s exposure…….nobody wins.

    We are on weak ground as a world economy, and the US has put itself more at risk with its endless corporate enriching wars than any other nation in history. The world economy is on the brink of collapse, and many will blame the US for what it has done since 2001-2002. They put a band aid on it with a real estate bubble that broke violently in 2007-08 causing entire nations to go bankrupt, and regardless of all the lies and fool statistics, the world has not recovered. Now, there is another collapse pending that will make 2007 look like a picnic, it will be far worse. This time, we have the EU, Japan and the US……..it will be a mess.

    The US money changers are now gambling with FDIC insured funds. The FED is sitting on piles of paper money nobody wants or needs. The US dollar has been abandoned as the world reserve currency by nearly 75% of the world nations, technology has made that need obsolete, too.

    Being the world reserve currency for so many years gave the US a great deal of power and opportunity that has vanished. The US dollar, once the most desirable in the world, is no longer needed to complete international trades. The great petrodollar is no more. OPEC’s disdainful response to the US request they slow production nearly a month ago tells me they are willing to take a sharp cut in income to ruin the US. They kicked the petrodollar to the curb with that move, and now, the US depends on the EU to keep the dollar afloat……and that is already breaking up.

    Yes, there is a lot of fear mongering, but it is the US that is in the deepest trouble……..

    Essentially, it is a collapse of the western economy, and the ascension of the east. Every thousand years or so, it seems to happen.


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