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More capital flight from Greek banks as depositors move  money out and draw-down to compensate for lower incomes

We often try and scope out the state of the Greek banking sector on this blog, because in our opinion, private sector bank solvency (or lack therof) represents a major soft-spot in the underbelly of the Greek economy. Not only is the Greek government running a deficit whose balance is being sustained by the Troika, but every time a Greek depositor goes to a local bank to pull out some money these days, that money is coming from the European Central Bank.
And it isn't just depositors looking to move their savings to a safer location that are taking their money out of the domestic banking system. As the following report form Moody's points out, there is also an inevitable drawdown in balances going on, as more Greeks are forced to tap into their savings in order to compensate for lower incomes.
Lastly, this report by Moody's reiterates a point that we have made before on this blog, and this is that the ECB's capital funding availability is such that total Greek bank liabilities (to the European Central Bank) exceed the ECB's own capital and reserves. The ECB cannot afford, therefore, to continue propping up Greek banks in the face of more capital flight without eventually confronting a solvency problem of its own.
Maybe this is why an Italian has been put in charge of running things at what is otherwise a hawkish ECB, with its headquarters in post-Weimar Germany. This is certainly not what the framers of Maastricht had envisioned.
From Moody's:

Our discussions with rated Greek banks last week and public information lead us to estimate that private-sector customer deposit outflows in the banking system amount to around 8% since the beginning of 2011, which is a key credit negative for Greek banks. The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece’s capability for timely repayment of its debt obligations. We expect Greek banks to find it increasingly challenging to lower their dependence on ECB repo funding as deposit balances continue to decline.
Private-sector deposits have been declining since late 2009, while outflows in May and June accelerated, as shown in the exhibit below. Greece’s heated political tensions (government reshuffling and resistance to the new austerity package) and the uncertainties regarding the Troika’s (European Union, European Central Bank, and International Monetary Fund) commitment to continue funding support to Greece are driving deposits elsewhere.

However, the roughly 8% deposit decline so far in 2011 also reflects the “cash-burn” effect of the country’s recession, with the economy expected to decline by 3.8% this year. We estimate that more than half of the year-to-date deposits decline is due to a steady draw-down of deposits to compensate for lower income by individuals and companies.
Based on recent media reports, confidence-sensitive depositors concerned about local banks’ financial health have also been transferring funds abroad and converting their deposits into gold coins, while others have been placing their cash into bank safety-boxes. The increasing liquidity risk for the banks is compounded by the volatile nature of government deposits, which are not incorporated in the exhibit above, and account for 6.7% of total deposits in April 2011 and are utilised to repay maturing government securities.

An acceleration of deposit outflows is one of the key risks for Greek banks and something that is beyond the control of either local or European authorities. A sustained decline of deposits by more than 35% (roughly equal to the consolidated banking system’s liquid assets and ECB funding availability) within a short period of time, would cause a severe shortage of cash among banks. This estimate takes into account the imminent availability of an additional €30 billion of government guarantees that can also be used for ECB funding, providing an extra buffer to any future deposit outflows, although these funds are yet to be dispersed. The availability of ECB funding through repo transactions would mitigate liquidity pressures, provided this method of funding remains available in the event of a sovereign default.

ECB funding has increased significantly since January 2010, as capital markets and the inter-bank market are still closed to Greek banks. The latest available data show that at the end of April 2011, overall ECB funding stood at €87 billion, comprising more than 21% of the banks’ total liabilities, compared to 59.4% for deposits. With the decline in customer deposits, we expect Greek banks to find it increasingly challenging to reduce their ECB funding dependence, which is their primary objective based on their funding plans committed to the Central Bank of Greece.