Amidst media reports speculating that Greek banks could exhaust their residual cash buffers in the next few days, Goldman Sachs anticipates the banks’ cash buffers could come under strain at any point.
Pawal Dziedzic and team at Goldman Sachs published a report titled: “ECB decisions post “no vote” unlikely to bring liquidity relief” on Monday following the “no” vote in the Greek referendum.
Greek banks’ cash buffers draining
The Goldman Sachs analysts point out that the Greek banks are currently funding deposit outflows with their remaining cash buffers, in the absence of the ECB providing liquidity backstops. They argue that without additional ECB liquidity, further restrictions on the present daily withdrawal allowance (EUR 60 per account) may soon become necessary.
Dziedzic and colleagues point out that at its Monday, July 6th meeting, the ECB’s General Council is anticipated to make a decision on the ELA cap for Greek banks and collateral haircuts. They note in the absence of a return in confidence to the sector, even an increase in the ELA facility would offer only temporary liquidity relief to Greek banks for two reasons. First, they note the ELA collateral is running low and the balance of the unpledged assets eligible for ELA discount is down to around EUR24 billion for the system:
The Goldman Sachs analysts also point out that each 10pp increase in a haircut on sovereign exposure would trim the pool by a further EUR8 billion.
Relaxing capital controls – Remember Cyprus experience
Drawing analogy from Cyprus experience, the analysts argue that the relaxation of imposed capital restrictions to be a prolonged and gradual process constrained by depleted liquidity buffers. They note Cypriot authorities implemented capital controls on March 27, 2013 in order to safeguard the stability of its financial system. However these restrictions were gradually eased and finally lifted only on April 26, 2015, over 2-years after initially implemented.
Dziedzic et al. recall that the introduction of capital controls occurred in the context of the rescue package agreed between Cyprus and the Troika. The analysts note the final agreement applied a 47.5% haircut to all balances over EUR100k and incorporated a bail-in of equity holders, bond holders, and large deposits at Laiki Bank.
The Goldman Sachs analysts anticipate the relaxation of imposed capital restrictions in Greece to be a prolonged and gradual process constrained by depleted liquidity buffers.
Focusing on the deposit outflows, the Goldman Sachs analysts note the latest deposit data released by the BoG on June 26 confirmed that domestic deposit outflows accelerated to EUR4.1 billion in May, with over 80% of outflows attributed to retail deposits. Drawing parallel between the deposit decline and increase in the ELA, the analysts point out that the decline closely tracks a EUR3.3 billion increase in the ELA over the same period.
Thus. Dziedzic and team argue that the incremental hike in the ELA by up to EUR11 billion in June would imply that deposit outflows have increased sharply.