Thursday, February 5, 2015

Draghi: Let’s Turn this Bank Run into a Stampede

Sorry, I think Paul Krugman’s grad school friendship with Mario Draghi has blinded him to the obvious.  Syriza, via Varoufakis, has refused the latest tranche of its “bailout” loan because it is convinced it can continue its debt payments past the end of February with its own resources.  That’s supposed to give it negotiating time.  But the real ticking clock is its banking system.  There has been a steady, persistent run on Greek banks, with deposits down 6% in the month before the latest election.  No doubt the rate has accelerated since then.  And now the ECB has announced that one of its two funding facilities to backstop the Greek financial system has been shut down until further notice.

You can debate what this means technically, whether the ECB’s emergency liquidity assistance (ELA) is large and credible enough to do the job, but the primary effect will be to turn the bank run into a rout.  That appears to be the intent.  This will presumably demonstrate to Syriza that the game is up, and there is no alternative but to stop making demands and get back on the program.  You would have to do a lot of analytical gymnastics to conclude, with Krugman, that an engineered Greek bank run is really just a covert message to Germany to be more reasonable.

The moment of decision for Syriza is not later but now.  Capitulation is out of the question.  The only choice is to formulate its own plan, separate from the ECB, to cope with the collapse of its banks.  I hope they recognize that direct attempts to stop the run through capital controls and withdrawal limits are a form of political suicide: if depositors are denied access to their funds the government will not last another week.  The task is to develop a source of funding that does not require prior withdrawal from the eurozone.

Meanwhile, it is difficult to express how utterly wrongheaded this latest ECB move really is.  It is one thing to equivocate about being a lender of last resort, another to foment a bank run on purpose.  Sort of like the fire department in Fahrenheit 451.

13 comments:

john c. halasz said...

This is an alternate reading, via Krugman:

http://coppolacomment.blogspot.co.uk/2015/02/what-on-earth-is-ecb-up-to.html

Also, you should be aware that this ECB move only concerns Greek bonds as collateral, not the ELA. But Greek bonds represent only a small share of Greek banks holdings, mostly bills, and much more has been collateralized for liquidity support from their own balance sheets. The bigger move by the ECB was the refusal to allow any increase in the Greek T-bills allotment directly denying the Greeks'request. But whether misunderstanding of the moves will accelerate the bank-run that is occurring anyway is an open question.

Peter Dorman said...

Perhaps I wasn't clear; I assumed readers would have already picked up the general drift of the story. The ECB suspended one of its two funding mechanisms, the use of Greek bonds as collateral. This is not the biggie, as you point out. But it shuts down one channel during a slow-motion bank run and signals limits on the other channel. If the intention wasn't to exacerbate the run, the ECB has grossly misjudged the situation.

JW Mason said...

Yes, I think this is right. It took me a while to understand this, but the real issue is not the Greek government debt, nor the current account balance, but the movement of deposits out of Greek banks.

The thing is, it's not obvious that exit from the euro would solve that problem. You'd need some kind of exchange controls as well.

The other point, which you don't quite spell out here, is that this is further evidence that what Europe s facing is not a "crisis" but the deliberate use of financial constraints as political instrument.

Peter said...

Weisbrot agrees with you but I don't know.

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/greece-ecb-kicks-syriza-in-the-face-syriza-turns-the-other-cheek

Coppola isn't friends with Draghi and she came up with the same reasoning as him. It's a wake up call to the Germans.

If it was up to the Germans, Draghi wouldn't have done QE.

If the Germans do give in to Syriza's demand then perhaps Krugman was right and the ploy worked as Draghi works some diplomacy.

If the Germans don't give an inch then perhaps Dormans and Weisbrot are right about the ECB.

I still think Draghi is going to try to bring the Germans around but will fail. The only way we'll know of this is if he comes out and says so. How independent is the ECB? Can the Germans pull Draghi?

Peter Dorman said...

On a personal level, I suspect Draghi thinks about how all this will affect Renzi and Italy. Renzi is mildly pro-Syriza, at least on austerity, according to reports. But Draghi is not a free agent and has to retain the support of his board. Perhaps there's not much point in trying to understand this move via some kind of psychological clairvoyance.

The other way is to reason backward, from consequences. (1) The ECB move is widely seen as spurring a more rapid run on the Greek banking system. (2) This run drastically compresses the available time for an agreement. (3) It also heightens the risks for Syriza, because, unlike a suspension of debt payments, a run has directly negative consequences for people who are part of Syriza's constituency. (Debt payment suspension is not as directly bad because of the primary surplus.) (4) Syriza would like a restructuring of its debt obligations, for instance a swap to GDP-based instruments. This cannot happen quickly.

Put it all together, and it's hard to see how the ECB move could be directed at Germany to anywhere near the extent it targets Greece. I read Coppola, and she doesn't make sense to me. It just sounds like wishful thinking.

I really really hope I'm wrong.

Peter said...

My response at Economist's view:

http://economistsview.typepad.com/economistsview/2015/02/links-for-02-06-15.html#comment-6a00d83451b33869e201bb07eb7fce970d

Peter said...

Krugman in his column today:

""Furthermore, there’s still reason to hope that the European Central Bank will refuse to play along.

On Wednesday, the central bank made an announcement that sounded like severe punishment for Greece, but wasn’t, because it left the really important channel of support for Greek banks (Emergency Liquidity Assistance — don’t ask) in place. So it was more of a wake-up call than anything else, and arguably it was as much a wake-up call for Germany as it was for Greece.

And what if the Germans don’t wake up? In that case we can hope that the central bank takes a stand and declares that its proper role is to do all it can to safeguard Europe’s economy and democratic institutions — not to act as Germany’s debt collector. As I said, we’re rapidly approaching a moment of truth.""

Peter said...

Weisbrot mention Ireland, but Ireland hadn't suffered as Greece has and hadn't just elected a Sinn Fein-Syriza.

The ECB and Draghi may look at it differently.

Italian technocrats came up with the idea of the common currency to yoke Italy to Germany. Germany went along. Draghi may try more than Germany to keep it together. Germany may be fine with letting Greece go.

JW Mason said...

"we can hope that the central bank takes a stand and declares that its proper role is to do all it can to safeguard Europe’s economy and democratic institutions"

Indeed, we can certainly hope that central banks are philosopher-kings who only want what's best for everyone.

the management said...

"I hope they recognize that direct attempts to stop the run through capital controls and withdrawal limits are a form of political suicide: if depositors are denied access to their funds the government will not last another week"

I would certainly be prepared to take the other size of that bet, in considerable size (not my house, but maybe my car). Capital controls are arguably what Greece needs right now - they have balanced the primary budget, and they need to stop capital flight. From the ECB's point of view, I'd agree that the move is political, but it also means that they are no longer financing capital flight.

There's a sensible negotiated solution here - with a lower primary surplus than the program (in which context I think Varoufakis' suggestion of 1.5% is not nearly ambitious enough), a return to the structural programs (the Port of Piraeus really does need to be taken out of the political sphere), and an agreement to kick the headline debt amount into the far future (in service of which aim I don't think all the funny financial engineering is helping).

The fall-back is a kind of soft exit, with capital controls. But the massive, massive advantage of capital controls over drachmaisation is that *they*preserve*foreign*exchange*. Greece imports fuel and food. With capital controls, it can be sure of financing vital imports. If you're worried about political survivability of deposit limits, how about fuel rationing?

Finally, I think everyone might be over-thinking this. The ECB had always said that this funding channel was conditional on the program being renewed. Syriza said they wouldn't renew the program, and the ECB took action accordingly. It certainly has to be important to Draghi to establish that agreements and deals have to be carried out, otherwise he loses all ability to do anything.

-dan davies

Peter Dorman said...

DD,

It's possible that cross-border capital controls could work, although in the European context, with a lot of legit, routine transactions going both ways, it would be difficult to pull off. What absolutely will not work, and which was the point of my "one week" time limit, is domestic withdrawal limits a la Argentina. That is absolutely a no-no, but without it, how do you stanch a run?

This is why I think some sort of quasi-, hidden, indirect drachmaization -- for deposit protection only -- is essential.

On your other two points: (1) Economically there is a zone of agreement, politically probably not. The compromise you suggest would probably be a disaster for the German government, as they have really painted themselves into a corner. I think you should also consider a bit whether the politics of "reform" is so amenable to a radical reconfiguration. (2) Am I over-thinking the ECB business? Well, we'll see. In a few weeks it will be clear one way or another.

JW Mason said...

As it happens, I just put up a post that makes the same argument Dan Davies does here: http://slackwire.blogspot.com/2015/02/what-if-ecb-pulls-trigger.html

Myrtle Blackwood said...

Re: (dan davies) "the massive, massive advantage of capital controls over drachmaisation is that *they*preserve*foreign*exchange*. Greece imports fuel and food. With capital controls, it can be sure of financing vital imports. If you're worried about political survivability of deposit limits, how about fuel rationing?"

I can't help but think that the consequences of turning households en-masse into mere 'consumers' is finally biting. The question of how to finance vital imports such as food and oil when whole economies have been shaped to be so dependent in the first instance.