Another Problem For Greece

While I'm not trying to run a news service here, I think it is essential that you understand the broad strokes of the fundamental situation on the ground, it makes it easier to identify problems, opportunities, etc when new data presents itself. Or in other words, simply to understand where things stand and be able to put them in to context-this would have been very valuable in 2008 while the banks were saying they had no more exposure to sub-prime and then came out quarter after quarter writing more of it off. In the Lehman situation, if you were cognizant of the 50% decline in pledgeable assets, you would have had early warning that Wall Street was abandoning the bank and there were huge problems there, a tactical advantage that wouldn't necessarily be present on a price chart.

Yesterday the ECB (European Central Bank) conducted the second and likely last LTRO (Long Term Repo Operation) in which they took in bank/financial institution assets in return for a 3 year, 1% loan. Since S&P rating's service downgraded Greece from CC to "Selective Default", there was a question whether Greek bonds would be eligible collateral to secure an ECB loan, th ECB ruled before the start of the operation that they WERE NOT eligible. What assets do you think Greek banks hold the most of? GBGs and the ECB said they are not accepting them as collateral, which means (although I haven't seen the specific list of banks that participated), Greek banks which are severely undercapitalized (and this is one of the problems and issues for the next Greek bailout-recapitalizing the Greek banks) went in to the LTRO at a severe disadvantage as far as collateral available to secure loans they desperately need.

The following was released today from the Bank of Greece...

What you are seeing here is data showing deposits at Greek banks have left the banks and likely the country (remember the earlier story this week about Greek politicians sending billions out of the country to protect their money). This is the 3rd largest outflow of deposits ever for Greek banks, $5.3 billion to be exact. Total bank cash is at the lowest levels since 2006.

The Finance Minister demanded that the Greek people return their deposits to local banks last week, there was a reason for this as Greek banks are now more undercapitalized then ever and probably didn't benefit much from yesterday's LTRO. This changes the complexion of the Greek bailout as the money set aside to recapitalize the banks in the deal is now not enough (and it wasn't enough before this outflow). The politicians are doing it, the people are doing it and if your local bank was in the news as potentially going insolvent, you'd probably be doing it to-it's called a bank run.

This complicates the bailout and puts Greece in a worse position then they were in a month ago.