Tuesday, April 21, 2015

Greek Deposits dwindling

When Greece imposes capital controls, the run on Greek banks will already have taken its toll. Deposits have already declined sharply since late last year.

Source ECB, Barclays Research

The Greek banks are replacing these lost deposits with emergency funds (ELA) from the Bank of Greece, who is in turn borrowing from the Eurosystem via Target2. With these banks increasingly dependent on central bank support, valuations are collapsing as the need for more bailouts becomes imminent. This is especially the case when Greece defaults on its bonds which are widely held by Greek banks.

Nearly 70% of Bundesbank's assets are in TARGET2 claims - a half a trillion euro exposure to periphery nations' central banks. What will the Germans do once they realize that a large portion of their central bank's assets could be at risk? A Grexit will reveal the TARGET2 exposure in all its glory !

As Greece imposes currency controls, depositors in other periphery nations are likely to also begin moving capital out of their domestic banking system. Portugal, Spain, and Italy are vulnerable. Such actions will of course end up increasing TARGET2 imbalances further, putting more of Bundesbank's balance sheet at risk.

Geir Solem

Elliott Wave Technician
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