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A recent paper tried to perform a very important exercise of evaluating the balance sheet effects of a Euro exit for various Euro countries. Its results were that the relevant sectoral net positions will be the main drivers of balance sheet effects. Periphery risks are concentrated on the net positions of the government and the central bank while the financial and non-financial sectors mostly hold a positive net position.

net position by sector and country

More specific risks do arise from the fact that certain sectors (within countries) have significant levels of short-term debts, although this fact does not change the overall picture substantially.

Debt by sector and country

I would like to use this opportunity in order to take a detailed view at the sectoral balance sheet risks from a Grexit scenario relying on BoG Greek NIIP data (data are for 2016Q3). I am focusing on specific categories and not taking categories such as direct investment or derivatives into account.

Greek Sectoral NIIP 2016Q3

On the asset side:

  • BoG now holds a large stock of foreign bonds as a result of its participation in the ECB QE program.
  • MFIs have a total of €19bn in deposits and €59bn in bonds a loans. Nevertheless, a large part of the latter are EFSF notes offered as part of the various rounds of Greek banks recapitalization exercises.
  • NFC and households have substantial claims in the form of deposits and banknotes, more than €52bn in total.
  • The general government holds no assets while its foreign exchange reserves are very low and mostly in the form of monetary gold. Although Greece does have a claim on the ECB reserves this would not change the picture in a serious way.

On the liability side:

  • The general government is the largest debtor with €28bn in bonds and €236bn in loan liabilities. Yet most of the bonds and almost all of the loans are long-term in nature.
  • BoG is the second largest debtor with almost €93bn in liabilities which consist of Target2 and extra banknotes.
  • MFIs have a large stock of liabilities in the form of deposits (which are usually a proxy for repo trades).
  • NFC and households have a very small stock of liabilities in the form of bonds and loans (a bit over €10bn).

Overall one observes that:

  • The largest part of the Greek NIIP is attributed to the Greek government with over €260bn in debt.
  • Taking into account the bonds held as part of QE, BoG net foreign liabilities drop to €47bn.Using the most recent available data (January BoG monthly statement) this figure further decreases to a bit over €38bn or close to 20% of GDP.
  • NFC and households hold a strong positive net claim from the RoW equal to almost €44bn. This most certainly masks firm-specific risks and mismatches but overall, the Greek non-bank private sector will improve its net position in the case of a currency depreciation (following a Grexit).
  • Using only deposits figures, Greek MFIs have a net liability close to €28bn. Since a large part of their liabilities will be under foreign (instead of domestic) law this creates a serious risk of missing debt payments or being unable to roll-over short-term repos and other obligations. Given that the Greek banking system will be the one intermediating in all of the private sector’s foreign transactions this net liability position can create rather difficult scenarios.

I will also use BoG MFI balance sheet data to take a closer look at Greek bank foreign risks:

Greek banks foreign risk Jan-2017

It is clear that things are a bit complicated, especially since Greek banks have a large stock of intra-group transactions with group members in other (Balkan?) countries. Nevertheless, after correcting for such transactions one observes that they owe €13.6bn in net liabilities to other MFIs (€18.5bn gross) and another €8.6bn in foreign deposits. The main source of risk will mostly be the first item which is usually secured by a standard contract (master agreements) and is under foreign law.Missing a payment on these liabilities will create serious problems for the corresponding bank and its ability to continue transacting in international markets. Obviously a risk assessment would be made easier if the maturity profile of these liabilities (and assets) was known.

Regarding the BoG liability position I believe that in the event of a Grexit, securities held for monetary purposes will be used to settle the largest part of Eurosystem claims while the remaining net position will be settled with some form of Greek government long-term securities (probably floating rate notes paying Euribor).

In summary, I generally agree with Kostas Lapavitsas who believes that a Grexit scenario will necessitate increasing Greek government foreign reserves to at least €12-15bn. The main immediate sources of risks are the short-term debt of the Greek government and Greek banks. The first consist mainly of liabilities towards the IMF (since SMP Greek bonds are under Greek law and would be converted to the new currency) while the second require a thorough risk analysis. A Grexit would be extremely difficult if Greece only held €7bn in foreign exchange reserves (with 2/3 being monetary gold) since a bank debt payment failure would create serious disruptions in the country’s international transactions.

Just a small post on the newly released June monthly statement by BoG:

BoG monthly statement June 2015

The large increase in central bank lending to Greek banks is quite evident: BoG loans were used to finance increased banknotes hoarding (+€5bn in a month) and deposit outflows (+€7.5bn). This increase stretched posted collateral which reached close to €200bn. Given that debt securities and credit claims held by Greek banks amount at a bit less than €300bn (with around €18bn being securities in currencies other than the Euro) with a significant part encumbered in various covered bonds and other securities it is obvious that banks were running out of available collateral and capital controls were really around the corner as long as ELA financing needs did not decrease. Obviously the increase in haircuts at the 6th Jule meeting only made matters worse. Based on the above numbers it is clear that it will be extremely difficult to relax capital controls without cash/deposits returning to the Greek banking system.

Another interesting observation is the extremely low figure for the government account which amounted at only €600mn. This reflects the large effort by the Greek government to keep paying official creditors during 2015 and the slow deterioration of state finances due to the ongoing recession. Since ELA was capped before the end of June the above figure suggests that the Greek government was in no position to pay the IMF on 30 June even if it wished to do so (since it could only use funds available at the BoG). Its financial position was extremely stretched and it would have to quickly decide whether to resist creditor demands by issuing IOUs or accepting the terms of a new bailout.

Even if government entities still had funds in bank accounts that could be tapped by the central government, the ELA cap made transferring them to the government account held at BoG close to impossible. These funds might be able to help in domestic payments to government employees and pensioners but would not allow paying (principal and interest on holdings of) foreign debtholders making Grexit very likely in order to avoid a general default on government debt.

One last issue that I don’t see people touching often is the fact that the very large ELA amount will result in significant windfall profits for BoG during 2015 which will be remitted back to the government. Assuming an ELA spread of 150bps over the MRO rate (BoG has to pay the MRO rate on its liabilities towards the Eurosystem), BoG should have already earned an amount close to €450mn in profits (although a part will probably be set aside as provisions). These profits might prove significant for the 2016 state budget execution.

A few days ago, this article would have started with the statement that Grexit is closer than ever. Today it seems that Grexit has been postponed for a few months. Yet I fail to understand the underlying strategy of the Greek government since the proposed austerity measures (along with capital controls and low confidence) are destined to push the economy in a deep recession. This recession will make achieving the primary surplus targets even harder and government debt clearly unsustainable (even based on the IMF’s quite optimistic projections). The current program will fail in 2016 and Grexit will come back on the table with a Greek government that enjoys a much more fragile domestic political support and an even weaker economy with a higher output gap.

Probably the biggest problem of returning to the drachma is the fact that there are certain (probable) scenarios where the economy almost collapses and others where we observe the usual path of a large devaluation following an unsustainable currency peg: A short-lived large fall in output followed by a long path of economic growth. Usually people will just choose the scenario that fits their story and ideology and not consider (or even imagine) any other possible paths. The ‘ugly scenario’ basically includes official creditors accelerating Greek debt in the form of EFSF loans and the Greek Loan Facility. That will push Greece in a permanent default state and most probably not make it able to accumulate any foreign reserves (since they would be claimed by creditors). EU structural funds will most likely be lost and Europe will not support the newly created currency exchange rate in any way. Greece will have to function in a ‘semi-pariah’ state with strict and permanent capital controls and an economy that will slowly lose most of its human capital and internationally oriented sectors (such as shipping).

In this blog post I will not analyze the above scenario any further but rather take a closer look at a controlled exit from the Eurozone which will include the help of the other Euro member countries (if not for anything else but to enhance the recovery of their official loans).

First of all let me remind people that currency movements happen mostly because of large gross capital flows and not due to the underlying real trade flows (this paper from BIS Claudio Borio is quite informative). Capital flows, at least in the short-term, will happen for only a few reasons:

  • RoW liquidating domestic claims in order to transform them in foreign currency (think of other Euro banks not rolling over repos with Greek banks or equity investors exiting the Greek stock exchange).
  • Domestic firms and households trying to exchange their liquid assets (mostly deposits) for foreign currency.
  • Institutional players taking large currency positions. This requires being able to borrow large amounts of the currency that will be shorted at favorable terms.

In the Greek case we know that a Grexit will happen under strict capital controls (which are already present), while the terms and price (interest rate) under which the RoW will access the drachma will be determined exclusively by Bank of Greece. Since drachma does not exist in any way, a Eurodollar market is not present and cannot help anyone to circumvent capital controls. Private players outside Greece have already liquidated most of their claims (either equity or interbank loans) while the bulk of Greek liabilities are long-term official loans by other Eurozone member countries. The same is true to a large extent for Greeks themselves who have moved large amounts of liquidity outside Greece. This is the main reason why BoG has more than €120bn in liabilities towards the Eurosystem (Target2 and extra banknotes combined).

As a result, coupled with the presence of capital controls and the fact that Greece already has a strong current account surplus (on a yearly basis) there is actually small scope for strong pressure on the exchange rate of a newly introduced drachma. It is probably one of the few times that capital controls can truly be used as a policy tool and not to trap large funds looking for a way out (as was the case in Iceland). As long as outstanding Greek debt to the ECB (in the form of SMP bonds) and the IMF is rescheduled in the form of a long-term loan by the ESM, the GLF spread over Euribor is lowered to  5bps and interest payments postponed until 2020 (as has already happened with the EFSF loan) Greece will have truly minimal refinancing needs (in terms of foreign currency obligations) for the rest of the decade and be able to slowly accumulate FX reserves through its current account surpluses.

The main subject where a host of different opinions exist is what will happen with ELA financing by BoG and the corresponding liabilities towards the Eurosystem. The story usually goes that BoG will have to default on these liabilities and the Eurosystem having to perform a large capital injection. In my view any such claim is most probably false, at least in the favorable scenario. EU already has an exchange rate mechanism for EU members that do not participate in the Euro area but wish to maintain a controlled exchange rate relationship, called ERM II. This mechanism defines a ‘central exchange rate’ with the Euro, with a fluctuation band of +/- 15%. Intervention at the margins is automatic and unlimited while a short-term financing facility exists with a maturity of 3 months (which can be renewed at least once):

for the currency of each participating non-euro area Member State (hereinafter ‘participating non-euro area currency’) a central rate against the euro is defined;

there is one standard fluctuation band of ± 15 % around the central rates;

intervention at the margins is in principle automatic and unlimited, with very short-term financing available.

For the purpose of intervention in euro and in the participating non-euro area currencies, the ECB and each participating non-euro area NCB shall open for each other very short-term credit facilities. The initial maturity for a very short-term financing operation shall be three months.

The financing operations under these facilities shall take the form of spot sales and purchases of participating currencies giving rise to corresponding claims and liabilities, denominated in the creditor’s currency, between the ECB and the participating non-euro area NCBs. The value date of the financing operations shall be identical to the value date of the intervention in the market. The ECB shall keep a record of all transactions conducted in the context of these facilities.

The very short-term financing facility is in principle automatically available and unlimited in amount for the purpose of financing intervention in participating currencies at the margins.

For the purpose of intramarginal intervention, the very short-term financing facility may, with the agreement of the central bank issuing the intervention currency, be made available subject to the following conditions: (a) the cumulative amount of such financing made available to the debtor central bank shall not exceed the latter’s ceiling as laid down in Annex II; (b) the debtor central bank shall make appropriate use of its foreign reserve holdings prior to drawing on the facility.

Outstanding very short-term financing balances shall be remunerated at the representative domestic three-month money market rate of the creditor’s currency prevailing on the trade date of the initial financing operation or, in the event of a renewal pursuant to Articles 10 and 11 of this Agreement, the three-month money market rate of the creditor’s currency prevailing two business days before the date on which the initial financing operation to be renewed falls due.

My view is that in the case of a Grexit current BoG liabilities towards the Eurosystem will be transformed into a long-term financing facility, capped somewhere close to their current level. BoG will have to pay interest to the Eurosystem, either the 3-month rate applicable to ERM II financing facility or the MRO (as it happens today for Target2 liabilities) with the clear agreement that BoG will use its FX reserves in order to slowly pay back the facility (through annual current account surpluses). This will obviously mean that BoG financing towards Greek banks will remain significant, absent a domestic QE program. Short-term financing by the Eurosystem will be provided in order to facilitate temporary FX needs (the Greek current account is actually in deficit during the first months of a year) and to allow the smooth payment of government liabilities denominated in Euros. Obviously this financing facility will be capped for intramarginal interventions.

As long as the central rate is reasonable and both sides are determined to defend it through monetary policy (interest rates), capital controls and automatic interventions, confidence on the drachma will quickly be strengthened and domestic players will have little reason to try to convert their assets into foreign currency.

Obviously one important problem is the fact that creating the actual physical currency will take time. Electronic payments as well as the over €50bn in Euro banknotes circulating in Greece right now (for a GDP of less than €179bn) will help minimize the short-term impact.

Although I hope the above will remain only a scenario exercise, it is my view that, given the political climate inside Europe and the short-term economic reality, Grexit will emerge again during 2016, especially if the current package is not accompanied by serious debt restructuring.

I ‘ve been rather silent on the ECB weekly statements for the past weeks since the released data pointed to lower stress in the Euro money markets. Still, an increase in ‘ Other claims on euro area credit institutions denominated in euro’ during October cannot go unnoticed:

 

The ‘Other claims’ accounting record is the placeholder for ELA as well as for reverse repo operations by the ECB. The latter are matched by ‘Other liabilities to euro area credit institutions denominated in euro’ which do not seem to have changed much in the relevant period. During the last few weeks, ‘Other Claims’ have grown by €21.05bn while MRO lending dropped €19.16bn. Although monetary liabilities to credit institutions (current accounts, deposit facility, fixed-term deposits) have dropped €40.25bn pointing to substantial easing in financial stress, the increase of ‘Other Claims’ most probably means that certain NCBs (with Greece and Cyprus as the most likely candidates) have increased ELA financing of their domestic credit institutions. More data will be available as soon as October balance sheets are released.

The fact that German Bundesbank Target2 claims registered at €719.35bn in October, up €23.89bn from the September €695.46bn figure (which was the first time in months when Target2 claims actually dropped) could be related.

Τον τελευταίο καιρό έχει γίνει αρκετά της μόδας η αναφορά στις υποχρεώσεις της ΤτΕ προς το Ευρωσύστημα και η σύνδεση τους με ‘δάνεια’ απο τις ‘πλεονασματικές’ Ευρωπαϊκές κεντρικές τράπεζες. Ορισμένοι μάλιστα θεωρούν ότι αυτά τα δάνεια είναι περιορισμένα απο το διαθέσιμο ενεργητικό των πιστωτριών ΚΤ, με συνέπεια να υπάρχει κίνδυνος αδυναμίας ολοκληρωσής διασυνοριακών συναλλαγών στο μέλλον.

Τα παραπάνω δεν έχουν καμία σχέση με την πραγματικότητα και είναι απορίας άξιο πώς, ακόμα και σημαντικοί οικονομολόγοι, αντιμετωπίζουν σημαντικές δυσκολίες στην εξέταση των ισολογισμών του Ευρωσυστήματος.

Κατ’ αρχήν ορισμένοι βασικοί ορισμοί. Το Ευρωσύστημα είναι (όπως και η Federal Reserve) ένα σύστημα κεντρικών τραπεζών με μία ενιαία αρχή, την ΕΚΤ. Κάθε ΚΤ είναι ισότιμη, με την ίδια, απεριόριστη ικανότητα δημιουργίας ευρώ και πραγματοποίησης πράξεων, με βάση πάντα τις κατευθύνσεις της ΕΚΤ. Το TARGET2 είναι το σύστημα διασυνοριακών πληρωμών στην Ευρωζώνη, ένα Real Time Gross Settlement System (RTGS),παρόμοιας λογικής με το Fedwire στις ΗΠΑ.

Κάθε κεντρική τράπεζα διαθέτει λογαριασμό στο TARGET2 με το αντίθετο άκρο να είναι η ΕΚΤ. Κάθε διασυνοριακή συναλλαγή έχει ώς αποτέλεσμα χρέωση/πίστωση των υπολοίπων των λογαριασμών αυτών. Καθώς το αντίθετο άκρο είναι η ΕΚΤ, η διαχείριση των υποχρεώσεων είναι πολύ ευκολότερη σε σχέση με το σενάριο κάθε ΚΤ να είχε να κάνει με όλες τις υπόλοιπες. Αν το υπόλοιπο είναι θετικό, η εγγραφή περιέχεται στο ενεργητικό της ΚΤ, διαφορετικά εγγράφεται στο παθητικό ώς υποχρέωση προς το Ευρωσύστημα. Οι ΚΤ με αρνητικό υπόλοιπο πληρώνουν επιτόκιο ίσο με το επιτόκιο χρηματοδότησης της ΕΚΤ προς την ΕΚΤ.

Όταν γίνει μία μεταφορά χρημάτων απο την ΕΤΕ προς την Deutsche Bank, η ΤτΕ θα χρεώσει το λογαριασμό bank reserves της ΕΤΕ και το υπόλοιπο με το Ευρωσύστημα, ενώ η Bundesbank θα πιστώσει το λογαριασμό bank reserves της Deutsche Bank και το υπόλοιπο με το Ευρωσύστημα. Αυτή η συναλλαγή θα δημιουργήσει ένα συστημικό έλλειμμα bank reserves στο Ελληνικό τραπεζικό σύστημα (εφόσον τα excess reserves που είναι πλέον διαθέσιμα δεν είναι επαρκή) και πλεόνασμα στο Γερμανικό τραπεζικό σύστημα. Καθώς η ΕΚΤ προσφέρει χαμηλό επιτόκιο στη διευκόλυνση αποδοχής καταθέσεων (σε σχέση με το επιτόκιο χρηματοδότησης), υπό κανονικές συνθήκες λειτουργίας της διατραπεζικής αγοράς, η Deutsche Bank θα επιχειρούσε να προσφέρει το πλεόνασμα της στη διατραπεζική όπου η ΕΤΕ θα το αποκτούσε (με κόστος το διατραπεζικό επιτόκιο). Έτσι κανονικά τα υπόλοιπα των λογαριασμών του Target2 είναι πολύ χαμηλά λόγω λειτουργίας της διατραπεζικής αγοράς χρήματος.

Πλέον, λόγω της κρίσης εμπιστοσύνης προς τα τραπεζικά συστήματα των περιφερειακών χωρών, οι Γερμανικές τράπεζες προτιμούν να διατηρούν τη ρευστότητα στην ΕΚΤ (με χαμηλότερο επιτόκιο) παρά να αναλάβουν το ρίσκο της συναλλαγής. Έτσι, οι Ελληνικές τράπεζες αναγκαστικά απευθύνονται στην ΤτΕ για την κάλυψη του ελλείμματος τους.

Ας δούμε τώρα αν η ΤτΕ ‘δανείζεται’ απο το Ευρωσύστημα. Παρότι η χρέωση του λογαριασμού bank reserves της ETE συμβαίνει ταυτόχρονα με την πίστωση του λογαριασμού της Deutsche Bank, σε λογικό επίπεδο μπορούμε να θεωρήσουμε ότι η χρέωση προηγείται της πίστωσης. Αν υπάρχουν περιορισμοί στη χρέωση, η συναλλαγή δεν μπορεί να γίνει. Η πραγματικότητα είναι ότι, προκειμένου να λειτουργεί χωρίς προβλήματα το σύστημα πληρωμών, οι ΚΤ προσφέρουν πάντα δυνατότητα overdraft στους λογαριασμούς των τραπεζών, εφόσον υπάρχουν διαθέσιμα κατάλληλα collateral. Σε intreday επίπεδο πρόκειται για daylight overdrafts ενώ στο τέλος της ημέρας, αν αυτά παραμένουν, γίνονται αυτόματα booked ώς αίτηση για παροχή οριακής χρηματοδότησης απο την ΚΤ. Η συνδρομή της ΚΤ είναι ανεξάρτητη του είδους της υποχρέωσης που δημιουργείται και περιορίζεται απο το collateral και όχι απο κάτι άλλο.

Το αν μια τράπεζα απαιτεί κεφάλαια για την κάλυψη αυξημένων απαιτήσεων του κοινού για χαρτονομίσματα ή για διασυνοριακές συναλλαγές είναι αδιάφορο για την ΤτΕ. Η λογική ότι η τελευταία δανείζεται απο την Bundesbank ισοδυναμεί με το να υποστηριχθεί ότι οι τράπεζες στο Ευρωσύστημα είναι περιορισμένες στα ποσά της ρευστότητας που μπορούν να παρέχουν ή ότι έχουν περιορισμούς στις υποχρεώσεις τους αναλόγως με το είδος τους (δηλαδή η ΤτΕ να μπορεί να παρέχει απεριόριστα χαρτονομίσματα αλλά ορισμένη και μόνο κάλυψη διασυνοριακών συναλλαγών). Η ΤτΕ όμως, όπως και όλες οι άλλες ΚΤ του Ευρωσυστήματος, είναι αναγκασμένη να καλύπτει κάθε έλλειμμα στους λογαριασμούς των τραπεζών (προκειμένου να λειτουργεί ομαλά το σύστημα συναλλαγών) και κάθε επιπλέον ανάγκη για bank reserves (προκειμένου να επιτυγχάνεται ο στόχος του διατραπεζικού επιτοκίου). Η λειτουργία όλων των ΚΤ στηρίζεται στη βασική αρχή να καθορίζουν την τιμή των bank reserves (τα οποία παρέχουν μονοπωλιακά και απεριόριστα) και μετά να κάνουν float την ποσότητα χωρίς περιορισμό. Περιορισμός εξ’ ορισμού θέτει σε κίνδυνο το σύστημα πληρωμών ή/και την ικανότητα καθορισμού του επιτοκίου και δεν έχει σχέση με τον τρόπο λειτουργίας τους.

Οι υποχρεώσεις και απαιτήσεις απο το Ευρωσύστημα είναι απλώς λογιστικές εγγραφές στους ισολογισμούς των ΚΤ, κατα τον ίδιο τρόπο που υπάρχουν παρόμοιες εγγραφές για τις 12 regional federal reserve banks στο σύστημα ΚΤ της Fed.

Πηγές: [1], [2]