Having spoken to a number of top bankers and financiers across Europe in the last 24 hours, the situation is extremely grave in regard to Greece and the Eurozone.
One hundred and one years after the start of the First World War, as Europe may get sucked into the financial equivalent of that war, the following salient points are worth noting:
1. The fragile Greek banking system has been irreparably damaged by the recent bank runs in Greece which have been colossal and measured in billions of euros per week in an accelerating spiral for the last few weeks.
2. All banking hinges on account holders’ confidence. No matter how solid a bank is, it will be unable to sustain most large depositors removing their deposits simultaneously. This is what is happening to all Greek banks which is a near impossible situation to control.
3. Events are now marching way ahead of the politicians’ abilities and negotiations. Those who think they are the masters and commanders of Greece’s destiny in Athens, Brussels, Frankfurt, Washington DC and Moscow are soon going to play second fiddle to the haemorrhaging Greek banking system in regard to which confidence has been mostly lost.
4. The amount of money in the vicinity of a few billion euros that the European Central Bank (ECB) has already pumped in and is willing to extend further to the Greek central bank to sustain the run on Greek banks is now insufficient in comparison to the money required to maintain unrestricted and unencumbered confidence in the failing Greek financial system.
5. With the net result that come next week, any combination of three draconian measures are likely to be announced by the Greek central bank and the Greek government:
a. Bank holiday(s) to stop the bank runs;
b. Capital controls to ensure that Greek citizens and entities don’t remit further funds abroad above an acceptable narrow limit;
c. Recapitalisation of Greek banks by doing a Cyprus style bail-in, ie, by raiding the deposits of account holders to shore up the capital adequacy of Greek banks.
6. Once a, b and/or c of point 5. are executed, the Greek exit is neither here nor there. It is a fait accompli because Greece will be paralysed and a quasi-Grexit will have happened automatically thanks to the Greek citizens having voted by switching their money from Greek banks to overseas banks.
7. The contagion may then spread into the European bond markets and also into the confidence associated with the single European currency and both may plunge significantly as ECB’s Target2 ends up with a hole in its chest. Target2 is the real-time gross settlement (RTGS) system owned and operated by the Eurosystem. Payment transactions are settled one by one on a continuous basis in central bank money with immediate finality. There is no upper or lower limit on the value of payments. The Greek crisis will render Target2 into no man’s land and therefore in uncharted waters.
8. At that point, we may be a short hop and skip away from a full blown Greek exit and that is simply because the Greek banking system will have de facto collapsed post a European Lehman-style event over which the politicians will have little or no control left.
9. As our organisation ATCA 5000 predicted many years ago, alongside other eminent think-tanks, the Greek situation within the euro could become unsustainable at some point and also the single currency itself would come under heavy pressure to splinter after departures from within its club.
10. To make matters even more complicated, there appears to be no mechanism to leave the Eurozone without exiting from the European Union.
11. The bigger issue going forward is the broad-brush destabilisation the Greek departure from Europe’s single currency may inflict on the stability of the European Union, the Eurozone and the global banking and financial system. It remains to be seen how big the contagion and chaos might be, although it is certain that there will be some mission critical fallout from this unfolding Greek crisis.