Financial Innovations and More to Help Greece Move Forward

It is a bit too familiar, isn't it?  Greece received a brand new loan so it can service its debt to the official creditors.  In exchange for the money, of which practically none remains in Greece, the government offers promised to carry out the reforms that the past few governments had agreed to but failed to implement.  Greece may no longer maintain arrears to the IMF, but it is balancing the budget by delaying payments in order to local service providers.

Last week, the actual Greek parliament approved the list of the items the creditors call "prior actions," committing the Greek government to those past reforms.  Tomorrow parliament will vote upon two other measures, the financial institution Recovery and Resolution Directive (BRRD) and a bill that modernizes the actual judicial system.  These measures are less controversial than last week's, but a few more Syriza MPs are likely to defect. 

The BRRD is an important calculate that will eventually enact throughout Europe.  It allows for senior bondholders and depositors will bear the cost of a failed financial institution before utilizing taxpayers’ money.  Many countries have not passed the directive.  In May, the EC gave Italia, France, and nine others EU countries two months to approve BRRD.

In Greece's case, invoking such measures may be counterproductive.  Using the banks re-opening for the first time in three weeks and capital controls still in place, confidence in the economic climate is poor.  Many are fearful that one way or the others, depositors are at risk of either a tax or confiscation of deposits within the 100k euro insurance threshold.  This fear encourages deposit trip, and in turn, prevents the raising of capital controls.   

Greek deposits have fallen by Thirty four bln euros since last October.  Many of those with the means to setup offshore accounts have probably done so.  There is much precedent (not only in Malta but in the US too) associated with not protecting deposits past the insurance level. 

However, in Greece's case, this would likely harm small and medium size Greek companies that have their working capital in the banks.  The contracting economy, the financial institution holiday, the capital controls and the government's tardiness in paying its service providers are already hurting Greek businesses.  Although current hard data is not available, one must assume that business loans are souring.  Taking the same business working capital via build up in excess of 100k would only aggravate the situation. 

Note that there are important variations between US deposit insurance coverage and Greece's.  First, the united states FDIC insurance applies to each account, not to each depositor.  In the US, the depositor can have more than one account.  Every account is insured.  Within Greece, the depositor is insured and with a lower ceiling compared to the US.  Second, during the turmoil, the US offered unlimited insurance coverage for non-interest bearing transaction accounts, used for working capital.   

These two innovations could be useful in Greece.  The objective of which is not so much to help anyone who has as it is to increase the likelihood of success.  Bailing in depositors, including those with an excess of 100k euros could do much more economic and financial harm than good.

What about the shareholders?  Surely, area of the recapitalization efforts should see them liquidated, that they will earmark some 25 bln pounds of a new aid bundle.  However, while the principle is appropriate, the application in Greece is suspect.  The top four banks in Greece account for 90% the.  Two of the banks (Piraeus and Leader) are two-thirds owned by the government and it owns 57% of a third (the nation’s Bank of Greece).  The only one of the top four banks that the government does not have a big part ownership stake is Eurobank (35%).  

Given these circumstances, liquidating shareholders would reverberate back again onto taxpayers.  It would not be particularly helpful in disciplining the owners.  It would likely complicate efforts to recapitalize the banks.  It may be more fruitful to consider consolidation as part of the recapitalization process.

Some measures that the creditors have demanded from A holiday in greece are narrow and petty, like opening up shops on Sunday.  However, some needs seem to be more generally good for Greece.  For example, as part of the "earlier actions" reforms approved last week, Greece agreed to make its nationwide statistics office independent.  1 cannot simply dismiss this as a function of Greece becoming a vassal state.  Similarly, the changes voted on tomorrow include modernizing and making more efficient the actual Greek judicial system.  This can cut the time and costs associated with civil action.  Renzi has pushed for similar reforms in Italy.

Last week's parliament vote saw 38 Syriza MPs vote against the government.  They replaced those cupboard officials that failed to offer the government.  Local press reports suggest another handful of Syriza MPS are likely to dissent tomorrow.  The bills will nevertheless pass, and by a wide border.  The problem is that it weakens the government. 

Recall Syriza experienced 149 seats in the 300-member chamber.  Its junior coalition member has 13 seats, giving the government 162 MPS. Given the dissents last week, if more than four defect tomorrow, the actual government's support would fall below 120, which is challenging to govern.  This is what is encouraging speculation of an election later this year. 

It is possible, and even most likely, that Syriza returns to federal government in a new election.  A newspaper poll put Syriza'utes support at 42.5%, nearly twice the support of recent Democracy, which is in second place at 21.5%.  However, the issue with an election is that it may delay the formal review of Greece's actual implementation from the measures it has promised.  Which in turn would delay your debt relief that now even Merkel has accepted as necessary and inevitable.

What's Next with regard to Greece? is republished with authorization from Marc to Market