Fincial Panic Intensifies in Greece

As further breakdowns in talks develop between banksters and Greek government officials, deposit outflows from Greek banks continue. Banks suffered a hit of €1bn on Thursday alone and about €3bn this week, according to two senior Athens-based bankers, reports FT.

Greek banks are relying on ECB funding and, in particular, its emergency liquidity assistance program, which they have tapped extensively as other sources of cash evaporate.

Until mid-May, Greece’s four largest banks — National Bank of Greece, Alpha, Piraeus and Eurobank — borrowed more than €110bn from the ECB, including more than €75bn in ELA, according to estimates from KBW Research.

The ECB on Wednesday raised its self-imposed limit on ELA by €1.1bn, to €84.1bn, and then approved another increase on Friday.

To qualify for emergency funding banks must be deemed solvent and also hold a sufficient quantity of high-quality securities to pledge as collateral.

Here's the kicker. FT explains:

The four biggest banks hold nearly €15bn in [Grrek government] securities, whose value would take a significant hit in case of a missed payment to the IMF.

A large portion of their capital is also comprised of so-called deferred tax assets, which allow banks to accumulate future tax credits from the government when they incur losses. In the case of Eurobank, DTAs are estimated to make up almost 90 per cent of the bank’s equity. For other large lenders, they account for about 50 per cent.

“Reported capital levels look comfortable on a static basis, but the quality is more questionable and heavy DTA usage is worrying,” said Alicia Chung, an analyst at Exane BNP Paribas. 

The ECB, which recently became the regulator of the eurozone’s largest banks, has already voiced concerns about DTAs. Any default would make these assets even harder to accept at face value...

Were the ECB to deem Greek banks insolvent and suspend ELA, analysts believe the government would have no option but to impose capital controls.

Greece may then confront an ugly choice between “bailing in” depositors to recapitalise the banks, as Cyprus did in 2013, or start printing a new currency to provide lenders with fresh liquidity.

 "Bailing in” means depositors would be forced to absorb part of the hit in the on going crisis and lose some of the funds on deposit.

  -RW