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What does the EU recovery fund deal mean for Greece?
Spain's challenges and opportunities in the EU recovery deal
Video talk: Removing obstacles for a deal on Next Generation EU
How Greek banks can balance on the collateral tightrope
The ongoing and troubled negotiations between Greece and its lenders, as well as the weekly meetings of the European Central Bank’s governing council mean that there is growing concern about the extent to which Greek banks will continue to be able to draw emergency liquidity to cover the outflow of deposits.
There are concerns that an ECB meeting even this week could lead to the haircut applied to collateral provided by Greek banks being increased, thereby restricting the liquidity available to the lenders. However, as we will see below if the ECB does make such a move and there are not any other dramatic developments, local banks should still have access to the liquidity they need
As a result of developments over the last few months, Greek banks have obviously been left in a fragile state. From December to March, Greece saw private sector deposit outflows of 26.8 billion. It seems they have risen by at least another 2.5 billion in April, given that the Bank of Greece (BoG) financial statement shows money in circulation increasing by a similar amount during the same month.
On top of those withdrawals banks are also witnessing outflows from the public sector entities following a legislative decree forcing the transfer of general government (gg) entities’ cash reserves from commercial banks to a cash management account at the BoG.
In March those outflows reached 1.5 billion and accelerated significantly in April, according to banking sources. The transfer of gg bodies’ deposits helps the government covering mainly its external funding needs, yet it has a direct negative impact on banks’ liquidity since those outflows have to be replaced by Emergency Liquidity Assistance (ELA) funding.
Based on the latest official BoG figures, Greek banks used ELA funding of 74.4 billion euros by the end of April. At the same time, their ECB funding, almost entirely made up by EFSF bonds, stood at 38.5 billion bringing their total Eurosystem funding reliance to 112.8 billion.
The ECB decided on May 12 to lift the ELA cap for Greek banks by 1.1 billion to 80 billion. Banking sources indicated that the ELA cash liquidity buffer stood at 3.5 billion euros, implying that banks have used ELA funding of 76.5 billion by that date. This is higher by 2 billion on the end-April figure, meaning that deposit outflows topped a similar amount in the first two weeks of May.
Assuming that the ECB will continue providing ELA funding to Greek banks since they remain solvent, the key questions going forward relate to additional ELA collateral availability and the impact from a potential higher haircut on that collateral.
As MacroPolis previously noted, banking sources have indicated that the haircuts currently applied on ELA collateral range from a low of around 10 percent for T-Bills to 20-30 percent for pillar II and III bonds and up to 50-55 percent for loans (less than 60 days past due) and GGBs. These haircuts are not publicly disclosed.
The breakdown of ELA eligible collateral shows that the bulk relates to pillar II bonds and loans. Based on the ELA funding mix of each bank, the weighted average haircut ranges between 25 and 35 percent for the four systemic Greek banks.
Assuming that the average haircut currently stands at around one-third of the pledged collateral, we conclude that the nominal value of this collateral is around 120 billion euros.
This means that for every 10 percentage points (pp) increase in the imposed haircut, Greek banks should replace liquidity of 12 billion euros with more collateral.
On top of the current ELA eligible collateral pool, banks can theoretically further use another 70-75 billion of collateral almost equally split between pillar II bonds and loans, as MacroPolis explained last month.
For pillar II in particular, issuing more bonds from their current level of 40-45 billion to the legislative cap of 85 billion requires approval by the Single Supervisory Mechanism (SSM) of the ECB and the European Commission’s Directorate General for Competition (DG Comp).
Additional bank support scheme guarantees of 15.6 billion euros have been issued in the first quarter of the year and both the SSM and the DG Comp have approved them. However, it is not clear, particularly on the issue of additional pillar II bonds, whether the relevant approval is guaranteed at the moment.
Under a best case scenario of the whole additional ELA eligible collateral pool being utilised, Greek banks could tap additional liquidity of up to 45 billion euros, of which 30 billion would stem from pillar II bonds and 15 billion from loans based on the currently applied haircuts. This is reduced by 8 billion for each 10 pp increase in haircut.
Overall, Greek banks could utilise a maximum of 200 billion euros in collateral, meaning that a rise in haircut by 10 pp would reduce the corresponding cash liquidity by 20 billion.
Summing up, in the event that the ECB increases the haircut on banks’ collateral and assuming that they have full access to the additional collateral, Greek banks could use incremental liquidity (from current levels) of 25 billion euros on a 10 pp increase in haircuts. However, this is reduced to just 5 billion if a rise of 20 pp in haircut is applied.
It appears that in the current relationship between Greece and the ECB, Greek banks have enough collateral to absorb any liquidity concerns assuming that there is no new acceleration of withdrawals.
However, if the haircut increases materially and the issue of additional pillar II bonds is not approved, while deposit outflows continue leaving the system at a higher pace, than the government would be left with hardly any time to conclude an agreement with its lenders.
*Manos Giakoumis is the head analyst at MacroPolis. You can follow him on Twitter: @ManosGiakoumis