Saturday, May 30, 2015

Betting on Grexit

A capital flight mechanism I hadn't thought of, from  Hans-Werner Sinn (HT Marginal revolution)
Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts),... 
 In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion. 
I knew Greeks are taking money out of bank deposits, and parking it abroad, and that in the end this money came from the ECB. When a Greek depositor wants his or her money, the Greek bank gets it from the Greek central bank, who gets it from the ECB, which prints it (metaphorically). It had not occurred to me that of course borrowing every cent you can from a Greek bank and parking it abroad is just as smart.

Of course, If Greece leaves the Euro, the Greek central bank goes bust, the ECB loses and Greek borrowers or ex-depositors keep their euros.

Hans-Werner seems to think capital controls are a good idea to stop this run. I think the likely imposition of capital controls is just why people are running in the first place. Similarly, if both Greece and Europe were to credibly say that Greek government default will not mean leaving the euro that would also stop the run.

But news for the day is this interesting run on the borrowing side, not just the depositor side.


  1. I have been wondering why Greece hadn't imposed controls earlier but if Varoufakis' strategy really is as Sinn outlines, it's brilliant. As Sinn frames it Athens doesn't want to impose capital controls because it makes Grexit more painful to the ECB with each passing day. Not only does it make Grexit less palatable with time, it allows Greek citizens to pilfer as much money from the EZ as they can borrow.

  2. A quick local reality check shows that :
    a) there has been no way one could have borrowed any significant amount of money from a Greek bank for the last five years. The amount borrowed by the Greek state is agreed in advance by Greece and its creditors-partners. This is no wonder, since an ever increasing proportion of the loans of the banks are not being serviced. In the last five months the European Central Bank has been supporting Greek banks with emergency liquidity under strict conditions. So the supposed stratagem of Varoufakis has been already pre-empted.
    b) most of the money withdrawn these days by Greeks from Greek banks is being redeposited in mattresses in Greece, not abroad. The techique is best illustrated here :
    Opening bank accounts abroad is not a very simple matter for Greek citizens and companies. Moreover, transfers of significant amounts of funds abroad are monitored by the bank of Greece, if only for purposes of containing tax evasion. So, in spite of the supposed freedom of movement of capital, some form of capital controls already exists.
    George J. Georganas

    1. Thanks, this helps a lot. Alas Simm's post didn't have links. Numbers on actual lending would help.

  3. Here is the aggregated (not the consolidated) balance sheet of Greek commercial banks compiled by the Bank of Greece :
    The web page with links to other cuts on the balance sheet data of the entire Greek financial sector is this :
    There is a big discontinuity in the data between May 2010 and June 2010, that is at the outbreak in the open of the Greek crisis. Nevertheless, the trends are pretty clear. My take is that the Werner-Sinn story referenced in the present thread seems to have no counterpart in the real world. Too clever, perhaps.
    Just to declare an interest and with apologies for veering a little off-topic, I sat in the same after-school-hours Economics class with Varoufakis in 1975-1977. We were preparing to take the university entrance examinations for admission to universities in the UK. There were just four students in that class, of which one, Nikos Tsouchlos, left quite early to pursue a career in music and conducting and now heads the Athens Conservatory. I have never met any of my classmates since.
    George J. Georganas

  4. Bloomberg showed the trend in March.

    Is the borrowing what matters in the current game of chicken? It's an interesting idea but the drain through deposit withdrawals is where the pain is. Any leakage through loans is just icing.  With every day of ELA and savings withdrawals the price tag goes up. It's no real surprise that there is a sudden chorus (Greek chorus?) calling for the abolition of hard currency.

    Thinking ahead,  I'm beginning to wonder if Brussels can gain, at best, a Pyrrhic victory. If they beat Syriza into the ground the message goes out that if you dare defy the Troika you will be reduced to a debt-client state with a puppet government. I doubt that will sit well with the growing anti-austerity factions across Europe. Whatever the outcome the anti-austerity movements will either be encouraged or inflamed.

  5. "It had not occurred to me that of course borrowing every cent you can from a Greek bank and parking it abroad is just as smart."

    I'm not sure what you mean by this. Are you implying a free lunch?

  6. First, I suppose, Sinn sees a one-way bet (that allows, besides, the gambler to push the odds in her favour by transferring money out of Greece). Then, a one-way bet can reasonably be expected to lead to a free lunch. However, the supposed bet is not so subtle that people in Greece could not have seen its potential. So, it was quickly forestalled by a mix of credit crunch and soft capital controls.
    George J. Georganas


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.