Greek banks are increasingly being hampered from trading currencies, one of the most liquid markets, as international dealers cut back credit lines and costs soar, according to people with knowledge of the trades.
International securities firms are curtailing trading with Greece’s major lenders that may expose them to the risk of a default by the nation and the possible use of capital controls to stem outflows from banks, the people said, asking not to be named because they are not authorized to speak publicly.
Those threats are adding to concern that the euro would decline in the event of a default or a Greek exit from the currency region, leaving counterparties exposed to multiple risks, said the people.
A months-long impasse on Greece’s bailout talks with creditors has prompted depositors to withdraw funds from the nation’s lenders, leaving banks no choice but to rely on emergency funds for liquidity. The ECB on Wednesday raised the limit on Emergency Liquidity Assistance and may consider tightening access to those funds if there’s no progress on talks next week, people familiar with the matter said.
“It only takes one decision by the ECB for the counterparty risk to materialize,” said Gabriel Sterne, head of global macro research at Oxford Economics.
Liquidity began to dry up in January, as snap elections led to a change in government that pledged to end austerity for the country. When negotiations between Greece and its creditors toughened at the start of April, international lenders started to cut off foreign-exchange lines, three of the people said.
Some global banks have already taken steps to reduce risks in foreign exchange trades even on transactions that are settled immediately, according to one person. For example, Greek counterparties may be asked to deliver their part of a euro-dollar trade first, even if that means they won’t receive what they are owed until the subsequent day.
“The latest sign the market is attempting to fortify itself against a Greek default is playing out in the FX market,” said Mark Williams, a former bank examiner for a Federal Reserve bank and now a lecturer at Boston University’s Questrom School of Business. “The market has increasingly become aggressive in preparing for a Greek default and in protecting itself from the potential financial impact.”
Officials for National Bank of Greece SA, Alpha Bank AE and Piraeus Bank SA declined to comment. Officials for Eurobank Ergasias SA didn’t immediately return calls. The four lenders control most of the industry’s assets.
A central bank official in Athens said he didn’t have a comment.
Greek bank bonds fell to record lows last month. National Bank of Greece’s 750 million euros ($853 million) of 4.375 percent bonds due April 2019 fell 25 cents on the euro this year to an all-time low of 54.3 cents on April 21, and the notes are now quoted at 61.6 cents, according to data compiled by Bloomberg.
Piraeus’s 5 percent notes due March 2017 also dropped 25 cents on the euro this year to a low of 60.5 cents last month, the data show. The bonds rose 0.3 cents on the euro Thursday to
66.1 cents, following three days of declines, according to the data.
While they’re still in a position to trade in the currency market, Greek banks are assuming additional risk as they struggle to hedge some of their positions and dealing costs have risen, said the people.
On some transactions, the bid-offer spread is as much as 50 percent higher than it was a year ago, said one person. Limited access to interbank trading has forced Greek banks to hoard an additional 5 billion euros to 6 billion euros in liquidity because they need to maintain higher buffers of cash, according to a Greek banking official.
One London-based FX sales trader said his bank continues to provide credit lines to Greek counterparties, but these are to just cover day-to-day foreign exchange needs, accommodating transactions on tenors that are no longer than a week, on a case-by-case basis.
The ECB raised the cap on ELA by 2 billion euros to 78.9 billion euros on Wednesday.