How do you say vicious circle in Greek?

Posted by Tracy Alloway on Dec 08 15:53.

Here’s a useful chart from UBS given recent events concerning the Hellenic Republic:
The chart shows funding from Europe’s Central Bank on a relative basis (against banking assets) at July 2009. You can see that Greece was the biggest user of ECB liquidity on that basis. On an absolute basis, we should note, Germany, was the ECB’s biggest customer at the time, followed by Ireland.
UBS analysts John-Paul Crutchley and Alastair Ryan wrote back in September:
Given that the Greek banks, like their German counterparts, do not have a liquidity problem as their balance sheets are typically 60-80% funded by deposits and L/Ds are at a maximum of 120%, we think the reasons [for the high use of ECB funding] are:
The banks were invited to receive low-cost ECB funding and took the opportunity by repoing sovereigns, also making a lucrative carry trade (Greek sovereign yields at c.4-5%, ECB funding at 1% = net spread of 3-4% or 2-3% if hedged for IR risk). On a near-€50bn position, that equates to €1.5-2bn of incremental profit for the Greek banking system. The Greek banks see this as a “natural hedge” against abnormally low rates which have harmed their core deposit profitability.
The Greek bank support plan was sovereign-bond based, i.e. the €4bn of prefs and €6bn of short-term liquidity were provided in the form of Greek Central bank loans to banks accounted for 9.6% of total assets of the Greek financial system sovereigns which banks could then repo with the ECB for liquidity (seignorage, in a way). So around €10bn out of the €45bn is related to this.
Weaning off from the ECB should be feasible, given that the repoed assets (Greek sovereigns and securitised loans) are also potentially repoable on the interbank market. As a matter of fact, for durations of up to 4M the interbank market is now cheaper than ECB’s 1% base rateIn addition, it is important to note that in 2009 the Greek banks are likely to be making 3-5% of NII (and a larger proportion of earnings) from the ECB carry trade. As a result, there is an underlying revenue/earnings risk associated to the eventual withdrawal of excess ECB funding.Underlying revenue/earnings risk indeed. But there’s another point touched on in that bit of (albeit dated) commentary.A downgrade of Greece’s long-term ratings to BBB+ — much of which had to do with the difficulty of the country weaning itself off ECB liquidity in the first place — could strike a further blow for the Hellenic Republic in terms of its ability to repo assets to the ECB.
As FT Alphaville has mentioned previously, under the original terms of its funding operations, the ECB would only accept bonds rated A- and above. Under emergency collateral rules issued in October 2008, those securities must be at least BBB, with anything rated BBB- subject to an additional haircut.
The issue then, is how long the emergency rules will apply for — and if you’re thinking a) `not that long’ and b) Greek banks might not be able to repo their bonds so easily/cheaply on the interbank market afterwards — then those Greek government bonds really aren’t looking so good.
And who’s been the biggest buyer of Greek sovereign debt?
The Greek banks of course:To get an idea of the relative scale of these purchases, it is instructive to compare the increase in national banking system bond purchases with the total level of issuance by the respective sovereigns.
Using this metric, the increase in Spanish bank holdings of government debt corresponds in volume to 73% of the Spanish sovereign issuance over the same period. The relative proportions for France and Italy are in fact much lower at 28% and 13% respectively. We emphasise, however, that our data refers to bank holdings of all government debt, and not only that of the particular country in which the banks operate.
Irish and Greek financial institutions are also punching above their weight, with increases of €15.4bn and €11.5bn in government debt holdings since July 2008. In absolute volume terms, this represents 62% and 20% of their respective sovereign’s issuance over the same period.