Greece...

princeofpounds

The ECB are providing liquidity to support Greek banks but I realise I don't understand what this means. Is the ECB providing liquidity which is then withdrawn on pay day from the cashpoint? That would make some sense to me because I still can't work out how any Greek would be daft enough to keep all but the bare minimum of Euros in a Greek bank.

To understand this you need to know a little about how banks work.


Banks have a load of liabilities, the most common types of which are deposits from customers. Although having cash in the bank is an asset to us, it is a liability to the bank because they have to pay it back to us when we want it.


Banks use these liabilities to finance - to buy or acquire basically - assets. The most common type of asset for a bank is a loan, naturally.


The banks aim to produce a higher return on their assets (loans) than their liabilities (deposits) and thereby make money.


The problem is that people generally don't want to lock up their deposits. They want to be able to get them on demand. Whilst very few people want to take loans that can be recalled at any second.


So banks have to run what is called a 'maturity mismatch'. It is a very valuable social function (indeed a crucial component of our modern world which is often under-appreciated), being able to use small, on-demand deposits to finance huge projects like pipelines, roads, or whatever. That is why it is permitted despite being a risk; the benefits are vast over time.


But it can go wrong if everyone wants their deposits back at once. Because whilst the bank will keep cash reserves, as well as loans in order to service the daily demand for cash withdrawals, once those are exhausted it cannot just call in loans. That is what is meant by illiquidity.


The bank may not even be bust (assets could still be worth more than liabilities). But that doesn't mean it can pay people back.


So, what the ECB is doing via the ELA is doing is basically giving short-term funding to the banks to replace the deposits that are being withdrawn and keep them liquid. This means that if you go to a cashpoint in Greece, you can still get money out.


This helps to stop a bank run, because nothing makes people want to get their money out of a bank faster than the belief it will soon be trapped. In history we have had bank runs for good reasons, and bank runs for little more than mass hysteria.


Just like a deposit, these are basically just short-term loans to the banks. So the ECB is happy to do this whilst it believes the banks will not go bust, if it thinks they will fail it will stop giving any liquidity. And then the whole thing will unravel quickly.

michaels

Just to add, normally if Joe Bloggs pulls out £10 and pays it to Fred Smith, Fred will then deposit it and so total bank deposits will not have fallen. If on a particular day all the withdrawals are from Bank A and Deposits are to bank B the national central bank can provide liquidity to bank a until the following day when the funds may well move back the other way.

However for the case of Greeece the withdrawals are from the Grrek banks and the deposits are to banks in other Euro countries (no brainer really) so the ECB steps in to do the central bank bit. The Greek banks still have the assets (loans) so the ECB considers this to be collateral when making up the cash shortfall. However much of this collateral is actually greek govt debt (the banks have made loans to the greek govt) so if the greek govt defaults then the banks will no longer have anything of value to offer the ECB to make up for the cash outflows. each week the ECB 'decides' that greek govt debt is suitable collateral and so extends its transfer of EUR to the greek banks btu this decision is not automatic and may well be the 'breaking poin' for if this lending stops then the banks will fail as they will literally no longer have the EUR to give to their depositors.

Generali

The ELA seems to have been extended (the scheme michaels was talking about)

http://www.telegraph.co.uk/finance/economics/11685405/Greek-debt-crisis-endgame-ECB-agrees-to-pump-more-money-into-Greeces-banks-as-Russia-enters-the-ring-live.html

The ECB's governing council is set to reassess the state of the banking system on Monday, report Reuters.
This is the day EU leaders have convened an emergency meeting to thrash out their differences. It also the day when ECB representatives told finance ministers on Thursday that the banks might not be able to open.
Well, they've been handed a reprieve today for a while at least. Interesting to note that the €3bn buffer had previously been enough to keep the banks afloat for a week. Now it seems, it's barely enough for two days.

mystic_trev

It looks like Greece might be sorted for the next few months.

Following a cabinet meeting in Athens, Tsipras is believed to have offered Greece’s creditors concessions on key issues such as VAT and pensions.

So much for the uncrossable red lines!

mwpt

Anyone who was took out a position on the ftse on Friday is going to be in the money tomorrow.

purch

mwpt wrote: »

Anyone who was took out a position on the ftse on Friday is going to be in the money tomorrow.

What sort of position.

Long, short straddle, covered call, naked put ?

They can't all be in the money

antrobus

mystic_trev wrote: »

It looks like Greece might be sorted for the next few months....So much for the uncrossable red lines!

According to the Guardian.

http://www.theguardian.com/world/2015/jun/21/greece-and-eurozone-leaders-in-last-ditch-scramble-to-reach-deal

But note the qualification; "It is not clear, however, whether the offer goes far enough to make a final agreement possible on Monday."

mystic_trev

purch wrote: »

What sort of position.

Long, short straddle, covered call, naked put ?

Missionary?

chucknorris

mwpt wrote: »

Anyone who was took out a position on the ftse on Friday is going to be in the money tomorrow.

That's for sure, I know 100%, because I was hoping my SIPP transfer from fidelity to HL would have arrived on Friday, in time for me to re-invested it (transferred to cash when the ftse was around 7,100). But it didn't arrive, so I have probably missed that (small) boat.

mwpt

purch wrote: »

What sort of position.

Long, short straddle, covered call, naked put ?

They can't all be in the money

Long. As in: it's been a long time since I met someone as smart as you on the internet.