Confidence Is The Name Of The Game

If the economy is all about psychology, as the latest Nobel Prize makes abundantly clear (*), then bond markets and banking are certainly all about confidence, aka trust.  

Confidence in Greek bonds and banks evaporated in 2010 and then slowly started to mend in 2013-14, only to deteriorate badly when the Leftist government took over. Deposits rushed out, capital controls were imposed, yields on bonds soared.  

And then... Left did an about face and went Right. Quite right!  

So, where is confidence in Greek bonds and banking now?  If you only listen to various Greek "analysts" you would think that things are still in the proverbial outhouse. Actually, trust and confidence are coming back very nicely. 

 Here are two charts.

• Since the beginning of 2017 the yield curve on Greek Government Bonds has moved down sharply across the  board. Medium term 3-7 year maturities have seen the biggest improvement, as one would expect.  As trust is restored, investors first buy the less volatile shorter maturities and then gradually extend to the longer end of the curve.

• Greek banks' reliance on the ECB's expensive Emergency Liquidity Assistance is coming down fast.  In just ten months it is down 47% by a whopping 24 billion euro, making their funding much cheaper (and increasing profit margins, aka NIM).  The decline became more pronounced starting in May.  Given that retail deposits have not yet come back in volume, where is the funding coming from to replace the ELA? Some of the decline comes from balance sheet deleveraging through asset sales, but a chunk of it must come from the wholesale market, i.e. interbank transactions with foreign counterparties, mainly in repos. This means credit lines are being restored, a major vote of confidence in the health of Greek banks.

(*) The 2017 Nobel Prize for Economics was awarded to Richard Thaler for his work on Behavioral Economics, a radical departure from the Chicago School's efficient market hypothesis.  Funny enough, the latter's "father" is Eugene Fama who also got a Nobel.  And they both teach at the University of Chicago!