Press reports of faster deposit outflows from Greek banks accord with developments on the ECB’s balance sheet last week.

“Other claims on euro area credit institutions denominated in euro” – a category that includes the Greek and Irish emergency liquidity assistance (ELA) operations – rose by €3.7 billion in the week to Friday. This may reflect Greek banks borrowing more to plug a funding gap created by deposit flight.

Greek banks are unable to increase borrowing under the ECB’s regular programmes (i.e. refinancing operations and the marginal lending facility) because of a lack of higher-quality collateral. Regular lending, however, rose by €7.0 billion last week, possibly indicating capital flight from other peripheral banking systems not currently constrained by a collateral shortage.

The €3.7 billion rise in “other claims” last week compares with a fall of €11.7 billion in Greek deposits during the first quarter. Domestic private sector deposits stood at €170 billion at the end of March, of which €66 billion was in overnight deposits. It is reasonable to expect this instantly-accessible cash to leave the Greek banking system amid current political and economic chaos, implying a heightened risk of deposits being frozen and/or redenominated in the event of EMU expulsion.

Faster capital flight could push Greece out of the euro well before next month’s elections, rendering current political manoeuvring irrelevant. The mechanism would be Greek banks losing access to additional ELA either because they run out of lower-quality collateral or because the Bundesbank and other “core” central banks place a cap on their Target2 exposure – why, after all, should German tax-payers underwrite high-risk lending serving the function of allowing austerity-resistant Greeks to transform deposits in bust domestic banks into Bunds and other “safe” assets?