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As Bank Withdrawals Surge, Athens Relies More on ECB


 


Greek depositors withdrew €700 million ($898 million) from the country's banks on Monday, fueling fears of a bank run amid the growing political disarray.

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With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area.

Greek President Karolos Papoulias told the country's political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some €800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures.

"The strength of banks is very weak right now," Mr. Papoulias said, citing a conversation he had with Greek central-bank Gov. George Provopoulos.

Monday's deposit withdrawal far outpaced Greek banks' steady decline in deposits since the start of the country's debt crisis in 2009, as depositors withdraw cash and transfer funds overseas. In the past two years, deposit outflows have generally averaged between €2 billion and €3 billion a month, though in January they topped €5 billion.


The latest data from the Greece's central bank show that total deposits held by domestic residents and companies stood at €165.36 billion in March.

With domestic funds drying up—and access to interbank lending markets shut down—Greek banks have become heavily dependent on the European Central Bank for funding needs. Greek banks borrowed €73 billion through the ECB's lending operations in January, say Bank of Greece figures, and an additional €54 billion via the ECB's emergency-lending facility, which allows Greece's central bank to lend money against a wider pool of collateral.

Risks associated with emergency lending remain with the Greek central bank and ultimately the Greek government and not the euro zone as a whole, as long as Greece is a member. Total borrowing from the ECB accounts for more than one-half of Greece's gross domestic product.

The ECB's emergency-lending facility isn't intended as a long-term fix. National central banks must get approval each month that they want to let their banks access the facility from the ECB's governing council, which can veto use of the program.

If Greece installs an antibailout government that reneges on its austerity promises, it would almost certainly be cut off from ECB funding. The ECB briefly rejected Greek bonds from its normal refinancing operations earlier this year after Athens was placed in default by major ratings agencies following its private-sector bond restructuring. Greek banks were still eligible for emergency funding.

Euro-zone officials have threatened to withhold rescue funds for Greece if it refuses to cut spending and make other reforms it promised as part of its latest bailout. The result would likely be another default on Greece's bonds, cutting it off from regular ECB funds.

With the ECB's emergency loans intended for solvent banks facing only temporary funding problems, access to even this window would most certainly be shut down as well.

Greece's situation illustrates how quickly circumstances can change for financial institutions that rely on customer confidence.

So far, at least, banks in other troubled euro zone countries aren't facing the same sort of acute liquidity problems that Greek institutions are suddenly suffering.

For example, in Portugal, which after Greece is considered among the candidates to one day leave the euro zone, banks actually have managed to increase their deposit bases. The governor of the Bank of Portugal recently said that household deposits rose by €11.6 billion last year and are still growing this year. Portugal's largest lender, Banco Espirito Santo, said Tuesday that its deposits at the end of March were up 17.7% from a year earlier.

Among Irish banks, flows of private sector deposits "have been broadly stable for some time now," although they remain in negative territory, the Central Bank of Ireland wrote in its quarterly report last month.

As long as the withdrawal of departures is a trickle, rather than a flood, banks generally can manage to replace the funding, even if they are locked out of the capital markets. Among their options, they can raise interest rates they offer on deposits or replace lost funds by borrowing from central banks.

In an extreme case, governments can impose capital controls to keep deposits from going abroad.

—Stelios Bouras, Nektaria Stamouli and Patricia Kowsmann contributed to this article.
Write to Brian Blackstone at brian.blackstone@dowjones.com and David Enrich at david.enrich@wsj.com

A version of this article appeared May 16, 2012, on page A9 in the U.S. edition of The Wall Street Journal, with the headline: Surging Bank Withdrawals Fuel Fears of a Messy Exit.