The lukewarm reception of Greece’s Stability and Growth Program by the capital markets, as evidenced in the high yields of last week’s T-bill auction and the widening of Greek bond spreads, shows the government has little room for maneuvering or for mistakes in policy. One of the biggest mistakes would be to press local banks to buy more public debt than they can normally assume and at the same time increase their liquidity needs via legislative initiatives. If there were any doubts about how the markets viewed Greece and more specifically its updated stability program, aimed at bringing the general government budget deficit to below 3.0 percent of GDP in 2012, these should have been made clear by last week’s T-bill auction and the reaction of the bond market. T-bills are short-term instruments used by governments to fund their borrowing needs more easily and are usually cheaper than issuing medium-to-long term bonds. However, Greece learned on January 12 that it had to pay an unusually large premium over market rates for such liquid debt instruments to raise a little more than 2 billion euros overall. Greece paid some 100 basis points over the 12-month Euribor to sell 52-week T-bills yielding 2.20 percent and more than 40 basis points over the six-month Euribor to sell 26-week T-bills yielding 1.38 percent. There is no question that the closing of the European Central Bank’s window of 12-month financing at 1.0 percent weighed heavily, as did the high cost of borrowing in the repo market by using Greek debt paper. It is hard to imagine though that Greek banks could not have come up with higher bids, which would have pushed the T-bill yields lower if they were not cautious about their deposits and their likely enhanced liquidity needs in the quarters ahead. This is normal after what happened in the last few months. One government misstep was to pre-announce that it will mandate that all Greeks report their bank deposits and justify where the money came from (declaration of assets or «pothen eshes») when they file income taxes. This move saw deposits worth more than 5 billion euros leave the local banking system in the October-November period. One should have expected such a move in a country where the underground economy is huge and «black (undeclared) money» is usually parked in local bank deposits. Still, it looks as if a good deal of the former outflows belonged to shipowners and other businessmen who took their money out of the country because they are distrustful of the Greek state. This means there is a lot of potential for more deposits to leave the country if people get scared either by the introduction of «pothen eshes» on deposits or/and the state’s inability to fund its borrowing needs and thus being forced to turn its attention to domestic deposits. Finance Minister Giorgos Papaconstantinou has said repeatedly lately that no «pothen eshes» on deposits will be required and this appears to have calmed the public’s fears but a number of Greeks still appear to be concerned, according to banking sources. Nevertheless, this is something banks cannot ignore in a year in which most forecasts expect domestic deposits either to stagnate or drop and funding from wholesale capital markets to become more expensive at best or scarce at worst. Although Greek banks proclaim they have plenty of liquidity to meet their requirements, one cannot rule out the possibility of the Greek state turning to them and asking them to purchase more debt instruments to finance its annual borrowing requirement of over 50 billion euros. This is less likely with private banks but is not unthinkable with state-controlled lenders. Needless to say, something like this would have likely led to the downgrade of these banks by international credit rating agencies. Still, the state does not have to put pressure on Greek banks to buy local bonds in order to increase their liquidity needs, as this can also be done by legislative means. There is little doubt that local banks will help the state at this difficult juncture, because it is also in their best interests. However, the government would be making a big mistake if it were to put pressure on banks to buy more Greek debt than they can carry on their books without undermining their credit ratings and goes ahead with legislation that increases their liquidity needs when markets have set their eyes on Greece.