If the new prime minister of Greece, Alexis Tsipras, hopes to make a deal with his country’s creditors, time is of the essence. Judging from data on capital flows, Greece’s change of political course is rapidly eroding confidence that it will stay in the European currency union.
Just because the 19 countries of the euro area share a currency doesn’t mean a euro in Greece is worth as much as a euro elsewhere. If, for example, Greece’s bank depositors start to worry that the country will exit the monetary union and leave them holding devalued drachma, they’ll move their money to a safer locale such as Germany, effectively trading their Greek euros for German ones. Such capital flight can be tracked (roughly) by looking at the accounts of central banks: If 1 billion euros moves out of Greece, the Bank of Greece records a corresponding 1-billion-euro liability to the rest of the euro area.
Lately, the Greek central bank’s so-called intra-Eurosystem liabilities have been rising at a pace not seen since the darkest days of the European financial crisis. In December, when the previous Greek government announced the snap presidential vote that ultimately cleared the way for Tsipras and his far-left Syriza party to take power, the liabilities increased by about 7.6 billion euros, according to data compiled by Bloomberg. That’s more than in any month since May 2011 — and it happened even before Syriza won the Jan. 25 parliamentary election on a platform that included promises to end austerity and renegotiate the government’s onerous debts.
Here’s a chart showing the estimated three-month cumulative capital flows between Greece and the euro area, as a percent of Greek gross domestic product (positive numbers are inflows to Greece):
The capital flight from Greece contrasts sharply with the progress the country had been making since mid-2012, when European Central Bank President Mario Draghi tamed markets with his promise to do “whatever it takes” to hold together the euro area. Over the two years through June 2014, the Bank of Greece’s intra-eurosystem liabilities declined by more than 75 billion euros as money flowed back in.
As Bloomberg View has noted, Tsipras is right that Europe should give Greece a break on its debts. That said, the longer the uncertainty over a deal lasts, the more the costs will erode the benefits.