They say a week is a long time in politics. In Greece, it has been an eventful week for the Syriza party which has entered government for the first time with its smaller right-wing coalition partner the Independent Greeks.
Already Syriza ministers and officials are coming out with colourful phrases and sound bites that have been lapped up by journalists. A Syriza foreign affairs spokesperson has described the Western sanctions imposed on Russia as “neo-colonial bulimia”. Meanwhile, Yanis Varoufakis, the new Greek finance minister, Professor of Economics and prolific blogger, has described the country’s austerity programmes as “fiscal water boarding”.
No doubt more colourful and unrepeatable phrases have been uttered in Mr Varoufakis’s office in the last few days. Perhaps not unexpectedly for him, the week so far has been a baptism of fire, with a banking crisis arriving in his in-tray. Yesterday Greek bank stocks suffered their worst one-day loss on record. The main Greek banks saw their share prices plunge by between 25-29% in just one day.
The Greek banking sector posted three consecutive days of double-digit declines, with the cumulative decline in the share prices amounting to a whopping 44%. As a result, the overall Athens Stock Exchange (ASE) index tumbled by 15% in just 3 days. This compares with a modest 0.7% decline over the same period for the Euro Stoxx index, which is Europe’s leading index of blue-chip companies for the Eurozone.
The Greek and wider Eurozone stock markets began to diverge as soon as the former Greek prime minister, Antonis Samaras, called for snap elections on 9th December. Since then, the Greek ASE has fallen by 31%, whereas the Euro Stoxx has increased by over 3%. Despite this steep fall in Greek equities, the ASE index remains almost 50% above the record low in mid-2012 when fears of a Grexit, or Greek exit from the Eurozone, were at their height. However, the share price of 3 of the 4 biggest Greek lenders hit record lows yesterday and the overall FTSE / Athex Banks Index is down 60% since the 9th December.
Investors and depositors are questioning the Greek banks’ liquidity in response to the confrontational negotiations with the new Syriza government and the Troika. There are also fears that the banks may be nationalised, as Syriza halts the sale of other state-owned assets. Essentially, the new government is unpicking the Troika deal with the previous Greek administration. Greek bank-deposit outflows accelerated last week to record levels. Withdrawals from Greek banks topped €14bn euros in the run-up to the snap elections that have brought Syriza into government. According to Bloomberg, one person familiar with the matter said that the outflows last week were greater than in May 2012 when Greece was on the brink of exiting the euro area. The deposit flight is due to both corporates and households. There are also unconfirmed reports that there are an increasing number of big fat Greek mattresses!
No doubt the European Central Bank is providing the Greek central bank with Emergency Liquidity Assistance (ELA). Without this support, bank failures within Greece would be inevitable. The ECB has come to the rescue this morning in terms of instilling some confidence in the Greek banking system, for now at least. Daniele Nouy, the chair of the ECB’s Supervisory Board, said Greek lenders are capable of surviving current market turbulence. Nouy said: “the Greek banks are facing a difficult situation right now because of the recent elections, but they are pretty strong”. The Greek banks’ balance sheets have been strengthened over the last few years.
Nouy added that “they will go through this crisis like they went through the previous ones”. These calming words have helped boost investor sentiment in the Greek banking sector today. Greek banking stocks have risen by 13% this afternoon at the time of writing.
It will be interesting to see whether yesterday’s flash banking crash will soften the negotiating tone of the new prime minister, Alexis Tsipras, and his cabinet colleagues. Clearly the new finance minister Mr Varoufakis will have plenty of sleepless nights ahead regardless of what is under his mattress!