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By John Schellhase

Deposits, Confidence Seep Out of Greek Banks

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By John Schellhase

August 10, 2015
   
   


 

The tensions between Greece and its troika of creditors are well-known. But another group of lenders to the Greek financial system has decided to stop handing over its euros—namely, Greek households and businesses. Since the end of last year, they have withdrawn €30 billion (US$33 billion) in deposits from Greece’s banking system, exacerbating the country’s liquidity crisis.

In the first five months of 2015, as negotiations grinded on at the highest levels of European policymaking, Greek citizens and businesses made withdrawals equivalent to 19 percent of all private deposits from the nation’s banking system. At the end of 2014, private deposits stood at €160 billion, but by May, deposits had fallen below €130 billion. This is the banking system’s lowest level of deposits since the summer of 2004. It is also a €100-billion drop from peak levels in 2009. During one period of fraught negotiations in February of this year, depositors were pulling €800 million from Greek banks every day. Apparently, many Greeks have begun to fear their country may leave the euro zone or enter a Cyprus-esque labyrinth in which a euro inside a Greek bank might soon be worth less than a euro elsewhere on the continent.

 

 

Link to the interactive chart

 

The Greek debt crisis has been an ongoing trauma since 2010, when Athens revealed huge holes in the country’s finances and submitted to a macroeconomic adjustment program from the International Monetary Fund (IMF). Eventually, the so-called troika of the IMF, the European Central Bank (ECB), and the European Commission extended €240 billion of relief to Greece.

Even after these interventions, as the chart above shows, the Greek debt-to-GDP ratio remains the highest in Europe at 177 percent, ahead of other crisis-hit countries like Italy and Ireland. (The chart includes data for Greece only from 2010, because there is no reliable data before that period.) Despite severe austerity measures—or due to them, as many argue—the economy has continued to shrink, with GDP down 25 percent from 2010 levels. In July, the IMF revised its debt predictions for Greece and now foresees government debt rising to nearly 200 percent of GDP “in the next two years.”

These revised projections came weeks after Greece failed to make a €1.5-billion payment to the IMF. Afterwards, negotiations entered a new, feverish stage, and Greece’s creditors froze disbursements. Fearing their citizens might also abandon the Greek financial system and continue to pull out hundreds of millions of euros, the national government imposed severe restrictions on how Greeks can access and use their own savings.

ATM withdrawals were limited to €60 a day, and foreign transactions were virtually forbidden as new capital controls came into place. Even after banks reopened on July 20, most of these restrictions have remained, paralyzing the Greek economy. Unable to pay suppliers, for example, small-business importers have basically had to close their doors while they wait for Athens and the European institutions to settle their differences. Speaking with NPR’s “Planet Money,” one well-informed Greek citizen foresaw food shortages in “about three weeks, three to four weeks if we continue like this.” He added, “After that, if I see that the situation escalates somehow, then I’m going to just get the family and get out of the country.”

In July, the European institutions put forward a new bailout offer of €86 billion to be disbursed over the next three years. But release of the funds depends on Greece meeting a variety of demands, including changes to the VAT system, pension reforms, and the creation of a fund to privatize a targeted €50-billion worth of Greek public assets to be managed “under the supervision of the relevant European Institutions.” The IMF, which would seem to prefer a write-down of Greek debt, has balked at joining the new bailout, and though Prime Minister Alexis Tsipras has pushed through broad reforms, Greece has still not entirely agreed to the program either.

For now, Athens remains strapped for cash, and Greek citizens can withdraw only €420 a week from their own bank accounts. In 2012, ECB President Mario Draghifamously promised that the ECB would “do whatever it takes to preserve the euro.” In the case of Greece, it is still not clear how much will be enough.

 

Photo credit: Sharon Mollerus (Creative Commons 2.0, Generic License)


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