Massive Demand Forces Currency Shortfall in Greek Banks!
No Vote Spurs Run on Greek Banks with Currency Traders Shorting the EuroPrior to the referendum in Greece on Sunday July 5th, there was widespread fear among banks that a major run on cash reserves would take place. As markets reopened, massive client demand resulted in long lines of customers outside banks and ATMs. The polls closed at 5PM UK time and official results were announced by 10PM. In the run-up to the referendum, many analysts were drawing parallels to the UK election in May, and the Scottish referendum on independence that took place in 2014. In both the latter cases, fears were quelled since stability remained in effect. However, the ‘No’ vote in Greece has set the proverbial cat among the pigeons.
The European Union, the European Central Bank and the International Monetary Fund will now be pondering their next moves, vis-à-vis Greece’s exit or integration into the EU. The ‘No’ vote has increased economic uncertainty, but it is still uncertain whether this will lead to Greece leaving the common currency area. A ‘No’ vote has already impacted on the EUR and its currency cross rates with its major trading partners. At last count, the EUR was trading at 1.0944 to the USD – marking a sharp decline from the 2008/2009 highs of the currency pair. While parity is a ways off, dollar strength is evident given the massive uncertainty currently playing out in the markets. Even in the face of growing insecurity leading up to the vote, the euro gained 0.7% to trade at $1.108 against the greenback, but the pair is now trending lower.
Money Supply to Greece May Run Out
Athens may now be forced to run a second currency in concert with the euro to keep banks afloat. With money in short supply, Greek banks may have no other option but to run a second currency. Should Greek membership of the common currency area be temporarily halted, the implications could be far reaching. A Grexit has been discussed by the German finance minister, but for its part, Greece is not intent on abandoning the euro. In the event that Greece issues IOUs (much like California did 6 years ago) Greece would be heading into dangerous territory. The difference between Greece and California is that that Greeks cannot possibly hope to repay the IOUs because the country requires an international bailout from the Troika. This will further imperil the euro and international investor confidence in the currency. In the absence of further bailouts, and resistance to austerity measures now certain the Greeks may be left with no choice but to reintroduce a second currency. That may or may not take the form of the drachma.
IOUs would most certainly result in a Grexit which would add further pressure to world markets and turn the mood on the euro bearish. There is growing consensus among high-ranking officials in Europe that a second currency may indeed come to pass. In the event that IOUs are issued, as many as 30% of Greeks may receive them. IOUs would be issued to public employees as payment and could be used to pay taxes, etcetera. With so much pressure already on Greece, and the mood already soured by what has transpired it is difficult to anticipate an upside in the saga. The Greek government and its negotiating parties with creditors are hoping that the referendum will cause a rethink of policy towards Greece.
Now, finance ministers are meeting to discuss the implications of a Grexit. But they are also discussing ways and means of structuring a bailout package and repayment options for Greece. The Greeks are in desperate need of euros to keep their banks running. Should Greece default on its July 20 repayment the European Central Bank (ECB) will maintain strict control over funding to Greek banks. A short supply of funding to Greece would inevitably result in a parallel currency which may begin with electronic transfers and IOUs but ultimately take the form of a full-on currency. Since the Greeks are in uncharted territory when it comes to leaving the euro zone, it is uncertain at best what direction the Greeks wish to take. They may adopt a parallel currency but it would not be valid outside Greece and payments to creditors would either need to be repaid or forgiven.
Future Prospects for the Euro
There has been increased volatility in the euro of late, which is expected given the outcome of the Greek referendum. For now, the Greeks do not wish to exit the EU. They are attempting to show solidarity to the Troika and negotiate from a position of strength. On the issue of a new Greek currency, the Deputy Finance Minister roundly rejected the notion. However, there is talk among officials that a Grexit is more likely than new terms of lending and repayment. Presently, Greeks are only permitted to withdraw €60 per day from their banking accounts and that figure is expected to decline for the nation of 11 million people. Failing an agreement with its creditors, Greece will have no choice but to exit the euro. However the risk that this may encourage other struggling nations like Ireland, Spain, Portugal and perhaps even Italy to stand up to the Troika is real.
The euro fell against the greenback as the second week of July kicked off. This was spurred in part by a fall in the German 10-year Bund yield. The ECB has retained liquidity for Greek banks at present levels but has increased reductions in excess collateral. The rot that took place in Greece may spread to other European countries, causing a wider ‘Euro Pandemic’. Intensive discussions in Brussels have had a bearish effect on the currency, but on a positive note the EC President JC Juncker has opposed calls for a Grexit. The euro slid from its mid-June highs of $1.14 to under $1.10 but selling has been restrained. The European Central Bank will likely take further QE measures to stabilize the market. For now the dollar is resurgent and the euro is hitting multi-week lows. Long-term however, the trend is looking bearish for the euro and bullish for the greenback.