Schaeuble Warns Defaults Can Surprise

As negotiations head down to the wire, Schaeuble repeats a message he gave a month ago Defaults Can Surprise.

German Finance Minister Wolfgang Schaeuble warned that sovereign defaults can catch officials off guard as Greece prepares for a finance ministers’ meeting Monday with the European Central Bank threatening to tighten the screw.

Greek officials are huddling with their creditors before the gathering in Brussels which could determine whether the ECB restricts the country’s access to emergency funding. ECB policy makers are looking for signs of concrete progress from the talks to justify maintaining access to the bank’s Emergency Liquidity Assistance.

Deal Difficult

Reuters reports Greece says deal will be ‘difficult’ at Eurogroup meeting

Finance Minister Yanis Varoufakis acknowledged that a deal to ease Greece’s cash crunch was not likely at a meeting of euro zone finance ministers later on Monday despite progress in talks with lenders on some issues.

Greece is under growing pressure to reach agreement with lenders to avoid financial chaos though many Greeks also want the government to stick to its “red lines” of avoiding further pension cuts and labor reforms making it easier to fire workers.

A 750 million euro debt repayment to the IMF falls due on Tuesday but Varoufakis said a deal that would provide some liquidity relief for Greece was more likely in the coming days.

“Τhe likelihood is not ruled out. The messages we are getting are that it will be difficult,” Varoufakis told Sto Kokkino radio on Monday.

Timeline of Obligations

The above from Goldman Sachs via Steen Jakobsen.

IMF Works on Contingency Plans for Greek Default

The Wall Street Journal reports IMF Works With Greece’s Neighbors to Contain Default Risks.

The International Monetary Fund is working with national authorities in southeastern Europe on contingency plans for a Greek default, a senior fund official said—a rare public admission that regulators are preparing for the potential failure to agree on continued aid for Athens.

Greek banks are big players in some of its neighbors’ financial systems. In Bulgaria, subsidiaries of National Bank of Greece SA, Alpha Bank SA, Piraeus Bank SA and Eurobank Ergasias SA own around 22% of banking assets, roughly the same as Greek banks own in Macedonia. Greek banks are also active in Romania, Albania and Serbia.

“We are in a dialogue with all of these countries,” said Jörg Decressin, deputy director of the IMF’s Europe department. “We are talking with them about the contingency plans they have, what measures they can take.”

Overall, the IMF believes that subsidiaries of Greek banks in southeastern Europe should be able to withstand the failure of their parent companies. “Our assessment of the Greek banks in that region is that they are fairly liquid; we have not seen major deposit outflow,” Mr. Decressin said. Because they are subsidiaries, rather than branches, the lenders have to hold their own capital buffers and can refinance themselves at national central banks. That would make it easier to split them off from their parent banks if necessary.

The IMF has nevertheless urged national supervisors and governments to keep a close eye on the situation. “There is high-frequency monitoring going on at the level of the authorities and our advice is that this needs to continue,” Mr. Decressin said.

One scenario that concerns the IMF is what could happen if panic over Greece’s finances pushes savers in the region to pull their money out of Greek-owned banks. “These banks…may be totally fine, but there could still be in the population a perception, these are Greek banks and they are not fine, and people would turn up and try to withdraw their deposits. That is something you cannot model,” Mr. Decressin said.

National safety nets have in the past been vulnerable to rumor-fueled bank runs. In June last year, the Bulgarian government had to take over Corporate Commercial Bank, after depositors pulled out their savings amid negative news reports about the lender’s main shareholder. It took the government six months to compensate the bank’s depositors, far longer than the 25 days mandated under European Union law.

Things Fine!

Got that? Things are fine as long as you don’t want your money that is supposedly available on demand, but isn’t. The stupidity of fractional reserve lending is staggering.

Mike “Mish” Shedlock