During the decade of the 90’s Japan was facing a long
term liquidity crisis as interest rates were essentially zero, and financial
stability was deteriorating. That meant that it was impossible to continue on
the same path of monetary policy. The economic crisis was attributed to two
factors: the Japanese banks, and the rise in the exchange rate of the yen.
This made Japanese exports very expensive and demand
as a consequence declined. Japanese banks would have been otherwise closed had
it not been for liquidity provided by the Central bank of Japan. The banks had
accumulated huge losses, bad debts, but with no capital enhancement so as to
clean their balance sheets.
As prices were plummeting and with negative
inflation(deflation), and the government unable to tackle the economic crisis
with expansionary fiscal policy, the central bank of Japan did the following:
buy government and private bonds, company stock so as to provide liquidity,
hoping in turn, they will invest into the economy. This was the case of
Quantitative easing (QE). It would work only in the case where these
institutions decided to turn around and provide the liquidity to the economy
by, say providing new loans in the case of banks.
The same situation occurred in the US during the financial
crisis of 2008. The FED reduced interest rates to 0.5% under its expansionary
monetary policy, while the administration at the time was promoting expansionary
fiscal policy (increase public expenditures). However none of these policies
were effective. This was the famous liquidity trap since it had the opposite
effect. The administration was forced to abandon the policy. This was where the
FED stepped in to apply the Japanese case of QE.
The United Kingdom also followed the steps of the FED
as well as the ECB. The difference with the ECB is that it came six years late
to apply QE. It decided to buy bonds worth 1.1 trillion euros, or 60 billion
euros per month until September 2016 so as to bring up inflation to about 2%.
The ECB decided to exclude Greece from this policy
claiming that it must first complete the program evaluation. In addition it
stopped accepting Greek bonds as collateral in exchange for providing liquidity
to Greek banks at very low rates. Banks now borrow from the ELA emergency
funding mechanism at higher rates. Just recently ELA loaned Greece 500 million
euros to counter balance the outflow of deposits from Greek banks, and
supplement liquidity.
Greek deposits now stand at 135 billion euros, loans
outstanding are at 210 billion euros, and this gap is covered by the ELA. At
this stage Greek banks are in no position to finance the Greek economy, and
whatever liquidity remains is sufficient to just cover daily business
activities and working capital of customers and businesses.
It is indicative of the fact that during the period
December 2014 to January 2015, bank deposits dropped by 14.6 billion euros, and
by 5 billion during February 2015. All this dangerous climate make banks uneasy
about the Greek economy, setting aside their plans since the continuing
uncertainty as well as the liquidity crunch may have a more drastic effect on
the already severe problem of bad loans on their books.
Bill T. Alexandratos, BA., MSc. Finance
billnyc60@gmail.com
