The Euro debt crisis took another nasty turn in Cyprus. It is worrisome
that Cyprus would be the first Eurozone country to impose capital controls
which is supposed to be against the fundamental tenets of the EU. Cyprus is
facing a bank crisis and also a confidence crisis. ATMs are almost empty and
real printed notes seem to be in high demand as few trust the banking system or
the Cypriot/European officials.
Greece found itself in a similar position. Greek citizens not trusting
their government withdrew cash from banks or transferred their money outside
Greece. The main fear in this case was Grexit. How did Greece cope with the
increasing demand for printed notes?
The total amount of printed notes in circulation is listed in the
consolidated balance sheet of the ECB. Currently it stands at around 884bln.
Part of it (8%) is held by the ECB itself and the remaining 92% is distributed
according to the percentage capital contribution each Central Bank has done.
Thus for example Italy has 145bln of Notes in circulation and Greece
around 23bln. However, as the crisis intensifies and Europeans lose confidence
in their governments they withdraw cash notes which are kept either in bank
safe deposits or at home.
This increases the demands for printed notes which can only be satisfied
if the respective central bank borrows the notes from other central banks that
may have surplus. The central banks cannot print new notes to throw in
circulation at will.
This is shown on the balance sheet of
the individual central banks. For example Greece records the amount of extra
crispy notes they borrowed from other banks in item 9.2 while their allocation
is item 1. In the Graph above we show
how Greece doubled the amount of cash in circulation to satisfy the appetite
for real cash. This was money borrowed from the Eurosystem. This of course
in a Target2 liability which is added to the Target2 balances of the country.
It is this cash that kept the ATM going in Greece. Since June 2012 the trend is
downward. Any reversing of this trend and we are back on crisis mode.
Conversely, it seems that Italy was net exported of printed notes
(possibly to Greece) and the item is recorded as “Other claims within the Eurosystem (net)” (item 9). Currently this
is at 5.8bln.
Conclusion
An early warning sign of distress in the southern European countries
could be the increasing demand for printed notes. Digging that number up from
the consolidated balance sheets sometimes poses a challenge.
