Published in LSE Hellenic Observatory Blog
Few
days after the introduction of the bank capital controls and with thousands of
pensioners queuing up outside the bank branches, the prime-minister’s office
received a research on the effect of the capital controls on the electorate.
The data disclosed were very surprising even counter-intuitive. It was apparent
that the closing of the banks had a very small negative effect.
For
sure, this was interpreted by the close advisors to the PM as a strong
indication of the resilience, and support the people showed towards the
negotiation tactics and also on the personal charisma and aura of the
prime-minister Mr. Tsipras.
There
is no doubt, that hundreds of thousands perhaps millions of people, owed money
to banks and this made many indifferent, some even having intense feelings of schadenfreude.
Equally true was the huge support that Syriza government enjoyed at the time
with record approval ratings of more than 70%. However, the small negative
reaction may have rather different causes.
Since the onset of
the crisis in 2010, companies and individuals tried hard to find ways to
protect their business interests, their savings and wealth. They desperately
tried to disengage or rather hedge their exposure to the Greek state (Tax) and
Greek banking system. In other words a panicky “save ourselves” mode of
operation.
We can discern two
periods in the money record. The first starts at the end of 2009 and concludes
with the elections in June 2012 and the second starts in November 2014 and
peaks in the summer of 2015.
In the first
period, there was a massive drop in the bank deposits either through direct transfers
abroad or through buying non-domestic funds. The main danger then was Grexit.
Most of the money was directed towards the UK, Holland and Germany (not
Switzerland as many have reported). At the same time the largest corporates
moved their treasury outside Greece.
In the second
period we had the flight of more than 45billion. This time however, most of the
money was withdrawn as physical cash that went in bank safes or under
bed-matrices. In this case we had a combination of risks, namely, both a
possible bank collapse and Grexit.
The result was
that most deposit balances dropped below the 100k threshold, no doubt with the
deposit guarantee in mind. In addition, thousands of companies moved into
Bulgaria and Cyprus in order to circumvent the capital controls. But once they
experienced the very low tax environment (10% in Bulgaria) they moved totally
depriving the Greek state of any possible tax revenue.
The result of the
above actions was a de-facto disengagement of economic life with the domestic
banking system. The economy adapted in an environment that strongly resembles that
of the drachma of the 80s. Almost no-one is going to a bank for a loan or to
deposit cash but only to pay everyday bills. The capital controls increased the
electronic and card transactions but only for the Euros that were locked in the
banking system. The cash according to the Bank of Greece Eurosystem data (so
called autonomous factors), outside the banking system only fell from a high of
50bln in June 2015 to 48.5billion in November. And this number is after
13billion of tourist money (much of it in cash) entered Greece during that
period. So there is significant part of the economy that now operates with
these 50+ billion only in cash.
We also had the
resurrection of a black market for “free” euros with a 5-7% premium. In other
words, two different prices, one for the Euros locked up in banks and a
different one for the cash outside. All of these, remind us of the glorious
drachma days, when there was a fully functioning black market for Deutschmarks
and Dollars and the banks played no significant role in the economy. Today, the
role of the drachma is played by the euros that are subject to the capital
controls. In other words we have a half-drachma state of affairs.
The breakup of the
economy into two disjoint parts (behavioural hedging) and the high tourist
season was probably the main reason why the recession was much lower than
expected (only -0.4% compared to -4%). This is the main survival mechanism of the
Greek companies/households.
Unfortunately for the Greek economy, this development is highly negative
long-term. It increases the black economy and deprives the state of taxes.
We also have a
zombie banking system that plays no role in the economy. This will take many
years to reverse. The recent decision of not forming a bad bank, for the huge
amount of non-performing-loans (110bln or 60% of GDP), will have an adverse
effect too. As long as these bad loans remain inside the banks they will cause
liquidity and capital shortage and the danger of bank resolution will hang on
them for a long time. These loans are backed by real estate and until and
unless real estate values recover they will be no bank recovery (see report here).
Prof. Varoufakis
may have not had the opportunity to complete his grand Grexit plan but was very
successful in travelling Greece back in time. To be exact, 30years back, in an
environment of half-drachma. Let us hope that in 2016 the government tactics
will allow Greece to return to the full Euro rather than the full drachma.
