European central banking 101?

It only ever happens when no one is looking. And it only happens in places that are great in making it happen when no one else is looking. Just don’t get caught, is the infamous mantra. The only problem with this is that it is very much old school, and we have long moved on. In today’s world, almost everything is retrievable by and visible to almost everybody. Ask the US presidential candidates.

It is particularly in Europe’s periphery where it appears people will never learn. The brush under the carpet, the short cut, the telling wink… This is how the current generation of 50 and 60 years olds grew up. It is part of their lives, almost second nature to them. Strangely, you don’t find this sort of behaviour only around those who struggle to make ends meet. You tend to also find it among people of authority. Their next generation is jobless by the way.

And so, if you were to have a closer look at the National Bank of Greece accounts laid in September, you would stumble across interesting facts. But firstly, let us just remind ourselves of what the latest and greatest is in the land of the former philosophers. You might recall that Greek banks still exist under the regime of capital controls, even though they have been softened up a little.

Depositors can now take out 840 Euros every 2 weeks. The allowance for corporate cross border transactions is 30,000, and the maximum amount transferable abroad is 350,000, albeit on the basis of a bureaucratic permission process. It may not be ideal yet for Greek citizens and enterprises, but as capital flight is no longer possible, it has had this positive effect of trimming Greece’s Target2 imbalance from record liabilities of -110 to -77 billion.

Also, at the end of July the ECB terminated its minimum credit requirement for Greek government bonds, so commercial banks can again use bonds they hold as collateral for regular repo business and raise funds for their operations. Interesting though that the banks have not been utilising this newly opened window much. For months now the National Bank’s receivables from monetary operations with banks have been declining.

Even the legendary ELAs, the ECB’s emergency liquidity assistance that was tapped into as a last resort to keep banks afloat at choking point, have been retreating and their volumes almost cut in half from the latest peak in 2015. In other words, there seem to be no liquidity constraints among the banks, as there appears to be not much demand for loan business from their customer base.

Be that as it may, the real surprise comes from the next position in the accounts. Securities held for monetary purposes have risen to in excess of 37 billion Euros. This wouldn’t be much of an eye-opener if the National Bank had joined in the asset purchasing program of the ECB. The problem however is that Greece as a bail-out country has long been excluded from the very program.

So the question is why would this position increase in volume. We get no answer from the accounts. There is simply no way to find out who is buying, whether it is buying on an official mandate, which is unlikely, or an unofficial one, or none at all. We don’t know what has been bought, whether it is government and/or corporate bonds, or asset-backed paper, and to what ratio. It all remains a mystery.

Is Greece’s central bank prophylactically accumulating assets, hoping for the day to arrive sooner rather than later when its ban gets lifted? That would be quite some foresight and also initiative on the part of Greek central bankers in making their own assumptions, as in accumulating assets now and pushing them over to the ECB whenever they will bend. Such an action can certainly not be in the eye of the monetary beholder in Frankfurt.

For now though, the only thing we know is that purchases rose from 5 billion in Q3 of 2014 to 37 now. Bizarre doesn’t begin to describe it. One would only hope that ECB and other eurozone central banks are having a closer look as well and start asking the right questions. In the scheme of things we may not be talking about gargantuan amounts of money, but it is a question of principle and the credibility of Europe’s money system that is at stake here.