Thursday, 16 July 2015

The Great Greek Bank Drama, Act I: Schaeuble's Sin Bin

 Greece's banks have been closed since 29th June. The closure followed the ECB's decision not to increase ELA funding after talks broke down between the Greek government and the Eurogroup.

The closure is doing immense economic damage. The cash withdrawal limit of 60 euros per bank card per day is restricting spending in the Greek economy to a trickle. Media generally focus more on the hardship that the cash limit causes for households: but far worse is the inability of businesses to access working capital and make essential payments. Businesses are failing at a rate of knots. People are losing their jobs. And bank loan defaults are rising rapidly.

The closure was, of course, the decision of the Greek government, as was the associated decision to impose partial capital controls. But it is hard to see that they had any choice. Deposits have been draining from Greek banks for months, but when talks broke down the outflows increased to a full-blown bank run. The  ECB's decision not to increase liquidity was rather analogous to refusing a blood transfusion when a patient is haemorraghing. Without additional liquidity support, the banks would quickly have bled to death.

Ordinarily, in a bank run the correct action for the central bank is to increase liquidity to accommodate the desire of the private sector to convert bank deposits into physical cash and/or move their money somewhere safer. But this is when the reason for the bank run is concerns about bank solvency. In the Greek case, the bank run was due to concerns about sovereign solvency, and in particular about the growing possibility of redenomination of deposits into a new, devalued currency. Since the reason for the bank run was political, therefore, I find it hard to criticise the ECB. It was in a cleft stick. If it increased liquidity, it was arguably supporting the Greek government. If it reduced it, it was supporting the Eurozone creditors. It therefore did neither. Maintaining ELA at its existing level was a politically neutral decision.

The real mistake was made by the Greek government. It was always obvious that the talks would be difficult, and the Greek government's "strength in weakness" approach meant that it had to allow itself to be pushed dangerously close to Grexit. Bank runs were inevitable. So allowing Greek banks to become totally reliant on a central bank controlled by Greece's Eurozone creditors - and itself a creditor - was a fatal flaw in the Greek government's strategy. It should have imposed capital controls long before. Had it done so, monetary conditions in Greece would still have been very tight but the banks could have remained open.

But the failure to impose capital controls early on was symptomatic of a much larger error. The Greek government allowed itself to drift close to the Grexit cliff edge in the belief that the Eurozone creditors would not dare push it over. On Sunday night, its bluff was called - and it had no response. It had not prepared for the possibility that it might actually have to do the unthinkable and leave the Euro.

The lack of a "plan B" meant that the Greek government was left with no choice but to cave in to its creditors' demands. I have criticised the methods used to break the Greek PM Alexis Tsipras, but the end result was inevitable. He could not accept the "temporary Grexit" plan put forward by Germany's Wolfgang Schaueble. To do so would be catastrophic for the Greek economy. "We do not have the foreign reserves for a Grexit", he explained afterwards. He is right, and those who think that Schaueble's "sin-bin" would have been better for Greece are wrong.

Greece's situation should properly be regarded as a foreign exchange crisis. It is using a foreign currency as its domestic currency, and now that the foreign issuer of that currency has turned off the taps, its only sources of currency are earnings from trade and international borrowing. Greece is of course unable to borrow on the international markets, so earnings from trade are the only possible source of currency. But Greece has a trade deficit, and it imports essentials such as fuel and some foodstuffs. So even with the banks closed and capital controls, there is still a net drain of Euros from the Greek economy.

UPDATE: Kleingut (see comments) points out that it is the current account not the trade balance that matters. This is correct. And for the last two years the current account has been in credit during the tourist season:

It is not clear whether this is sufficient to make Euro earnings positive on an annualised basis. And the wide swings in Euro income need to be buffered by reserves to avoid cash flow problems. But more importantly, it is now a racing certainty that income from tourism will fall significantly in 2015. Bookings are down by 30% despite  operators slashing prices. Even without Grexit, therefore, Greece will have a foreign exchange problem in the autumn if not before unless ELA is restored.
So the hope is that with agreement on a new bailout, the ECB will turn the ELA taps back on, easing monetary conditions and allowing discretionary cross-border trade to resume.

Schaueble's scheme would have ended this hope. Here is how it is described in the short paper leaked to the press on Saturday:
In case debt sustainability and a credible implementation perspective cannot be ensured up front, Greece should be offered swift negotiations on a time-out from the Eurozone, with possible debt restructuring, if necessary, in a Paris Club-like format over at least the next 5 years. Only this way forward could allow for sufficient debt restructuring, which would not be in line with the membership in a monetary union (Art. 125 TFEU).
The time-out should be accompanied by supporting Greece as an EU member and the Greek people with growth-enhancing, humanitarian and technical assistance over the next years. 
As always, the devil is in the detail. Greece cannot be prevented from using the Euro, either domestically or internationally. But since it cannot borrow internationally and its Euro earnings are net negative, its access to supplies of the Euro can be completely cut off.  A "time-out" would presumably be implemented by removing ELA from the banks, forcing them to relinquish their Euro reserves, and possibly also by suspending its membership of the Target2 international Euro settlement system, although as Target2 includes among its members four non-Euro users, this would be politically problematic. But removing ELA would be sufficient to exclude Greece from Euro membership.

And it would have terrible consequences. As Silvia Merler explains, ELA is a significant part of the Greek banks' liabilities:
At the aggregate level, central bank liquidity accounted for about 30% of total liabilities the Greek banking system, as of May 2015. At the level of individual institutions, ECB lending was equivalent to 21% of assets in NBG, 37% in both Alpha and Piraeus and 39% in Eurobank. 
Removing ELA would be the equivalent of a simply enormous cash margin call - and as those familiar with the fall of the American insurance giant AIG will no doubt recall, large sudden cash margin calls can break financial institutions. Suddenly removing ELA from Greek banks would undoubtedly break them. Schaueble's "time-out" means the bankruptcy of the entire Greek banking sector.

It also means the denial of cash to Greek households and the loss of household and business deposits in the inevitable bank insolvencies. So it is not just the banks who would be suddenly insolvent. It would be the whole of Greek society.

The solution to this is of course for the Greek government to seize the Greek central bank (which is currently part of the Eurosystem) and force it to replace the lost ELA with a new Greek currency. Realistically this would be a Greek Euro, not drachma. The banks could then be recapitalised by the Greek state (i.e. nationalised) using money created by the now-captive central bank, rather than international borrowing. And since the new currency would be Euro not drachma, household and business deposits would not need to be redenominated. This sounds like a plan, doesn't it?

The domestic monetary squeeze could indeed be solved by creating Greek euros. But these would not be accepted internationally, since the ECB would regard them as counterfeit money. So Greece would still have to find "proper" euros, or perhaps US dollars or sterling, to pay for its imports - and although such a tight monetary squeeze would cause a sharp fall in imports, having to curtail essential imports because of lack of foreign exchange would do the sort of damage to the economy that cutting supply lines does in a war. Countries can be broken through lack of foreign exchange. Just ask India.

There is a further problem with Schaeuble's scheme. It envisages debt restructuring in a Paris Club-type arrangement. But all of Greece's debt is Euro-denominated. Grexit, even on a supposedly temporary basis, would leave Greece with no means whatsoever of obtaining the Euros to service that debt. Here, courtesy of RBC Capital Markets, is a graphic showing Greece's repayment schedule over the next few years:

The chart shows that if Greece were completely cut off from Euro supplies, default on its debts to the ECB, the IMF and the private sector would be certain, although the Eurozone might decide to swap out the ECB's holdings with the ESM - a ruse suggested originally by the Greek government's erstwhile finance minister Yanis Varoufakis. Interestingly, though, payments to other Eurozone official creditors would not be affected provided that Greece returned to Euro membership by 2020. Schaueble's choice of 5 years is not accidental. Temporary exit would force losses on to the IMF and the private sector ahead of Eurozone official creditors. Nice.

Defaulting on payment to the IMF prevents the IMF or its partner Bretton Woods organisation, the World Bank, offering further aid. All humanitarian relief would therefore have to come through bilateral assistance from friendly countries. And this is where the geopolitics gets nasty. Russia has already offered to maintain gas supplies, and I'm sure further "humanitarian assistance" would be offered if Greece were forced into a Grexit, whether permanent or temporary. That would go down REALLY well with the USA.

But what about this Paris Club lark? If I were the Club de Paris, I wouldn't touch this with a barge pole. Greece is already in IMF arrears. It is by Club de Paris standards a rich country, so would not qualify for exceptional assistance. And its official creditors have so far shown complete intransigence as far as debt relief is concerned - yes, even the IMF, which wants everyone except itself to restructure Greece's debt. Admittedly, Schaueble suggests that Eurozone creditors might be more willing to consider debt restructuring including NPV haircut if Greece were not in the Eurozone, but as Greece would still be an EU member it's really not clear why the Club de Paris should be involved. It would risk being drawn into the Eurozone's political quagmire for no purpose.

The fact is that Schaueble's "sin bin" would be the worst possible outcome for Greece. Even a permanent Grexit including leaving the EU would be preferable, since at least then it could default on Euro-denominated debts. But it would still face a foreign exchange crunch due to its import dependence. Grexit is toxic while Greece's export sector is so weak.

Alexis Tsipras and Euclid Tsakalotos made the best decision possible in a dreadful situation. They should be commended for that. But the drama is not over yet. This show begins and ends with banks - and Greek banks are now terribly damaged. The bailout includes proposals for restructuring them which will inflict further severe damage on the Greek economy and almost certainly lead to the failure of the new program. I shall discuss this in my next post.


  1. But surely a "sin bin" would be subject to further negotiation, and if Germany wanted Greek exit badly enough, could it be arranged to mitigate or eliminate many of the problems you cite? I don't approve of how Schauble has behaved, but some form of negotiated euro exit for Greece in the very near future, while remaining in the EU, looks much better for Greece than the "Agreekment" now in the works. Also, has anyone circulated the alternative "time out" proposal that Costas Lapavitsas reportedly made during the parliamentary debate?

    1. I imagine that humanitarian aid would be offered, but I don't see that there would be any desire to make a "sin bin" anything other than horrible. It would be regarded as just punishment.

      A negotiated settlement would have to include injection of Euro reserves, probably to back the new currency in some form of currency board arrangement. I don't see any political will for that either. Disorderly Grexit is politically preferable for the Eurozone - after all they would hardly want to see Greece prospering after exit: what message would that send to other periphery countries?

      I haven't seen Lapavitsas's proposal, though I know his thinking on how a Grexit could be achieved is similar to mine.

    2. ''Disorderly Grexit is politically preferable for the Eurozone''

      that's quite a claim you make, I don't think they want a failed state on their doorstep. Greece is such a special case, and no threat to the eurozone project, that I believe they prefer orderly Grexit.

    3. If the Eurozone had a coherent foreign policy and any grasp of geopolitical realities in the Balkans I would agree with you. But it doesn't. It's focus is narrowly on the success of the Euro project. Therefore it would not regard easing Greece's path out of the Eurozone as either necessary or desirable.

      To be fair, I would not say this of Schaueble - I think the problem there is that he doesn't have a sufficient grasp of monetary economics to understand the massive problems with his proposal.

    4. *its focus*. Apple predictive text, meh.

  2. I am not sure that the socalled 'FX reserves', or rather the absence of them, is Greece's greatest problem. For 2013 and 2014, the current account surplus was 1,1 BEUR and 1,6 BEUR, respectively, and this AFTER interest payments of roughly 6 BEUR in each year. So the Greek economy had a lot more 'foreign Euros' coming in that it sent out. Of course, the last 6 months have turned tables upside down but my guess is that, before interest, the current account would still be positive, particularly now that the tourist season is booming. And - the Bank of Greece shows foreign securities of about 20 BEUR on its asset side (would be interesting to know where they are held) and, of course, some gold.

    Greece has always, also during Drachma times, had the traditional weaknesses of corruption, public sector inefficiency, etc. etc. And yet --- when Konstantinos Karamanlis handed the country over to Andreas Papandreou in 1980, Greece had more or less full employment, a budget deficit below 3% and a national debt of 21% of GDP. Yes, Greece was a far poorer country then but it could manage quite well and I am sure that many Greeks today would love to have the Greece of 1980 back today.

    Whether or not a return to the Drachma would work depends entirely on how much Europe would be prepared to invest in the reconstruction of a Drachma Greece (debt forgiveness, very substantial aid to make the transition tolerable). Without such very significant aid, and particularly with an unplanned or unorganized Grexit, one might as well rename the new Drachma-Greece into the 'Cuba of Europe'.

    Europe would have to aid Greece to reconstruct the, albeit moderate, industrial capacity which was destroyed in the 80s and 90s after joining the EU. There would have to be significant 'infant industry protection' and control that the protected industry becomes efficient and competitive. The entire agricultural sector would need to be revamped with a focus on making products shelf-ready instead of exporting in bulk.

    In short, I think a return to the Drachma could be doable and could eventually lead to a prosperous Greece but if Europe thinks they already did a lot to keep Greece in the Eurozone, they would have to do much more than that to get Greece out of the Eurozone. Unless, of course, Europe is prepared to have an economic Cuba at its South-Eastern flank.

    1. Kleingut, I've updated the piece to respond to your comment about the current account. The surplus is entirely seasonal and will probably disappear this year.

      The rest of your comment I think is fair.

    2. I hate having to agree with him, but Klaus is spot on with his analysis. The sad conclusion is that GR is fully dependent on its "partners" (well, to be honest, Germans): not to kill it in the EZ, not to let it die out of it. Why on earth would a BILD-reading people be prevented from either? Not everybody in this country is married to a Greek.

  3. Thanks. Can't argue with the way the "realpolitik" is going. Whatever "sin bin" means in German, you are likely right that -- at the moment -- it would be designed to plunge Greece into a showcase of hell. A Europe-wide change in attitude toward the euro -- where a majority of its citizens were calling for exits for more than just Greece -- would probably be needed to make less painful transitions possible. (Just saw a tweet from Italy that only 26% of Italians trust the EU, but that may be migration issues mainly). If I can track down what Lapasvitsas reportedly said at the debate in favor of a temporary time out , I'll pass it along.

  4. I agree: "This show begins and ends with banks ..." I believe they need some restructuring and I'm now looking forward to your next post - to see why the proposals for restructuring would further harm the Greek economy.
    I'm no expert but in my opinion to write off the accumulated debt is not enough. It's true that Greece was victimised. However, the picture is not black and white. Let's not forget that Greece should change some of its bad practices, and a shift in the Greek mindset would be beneficial, too. The shift from seeing oneself as a victim to becoming a generator of change and good practice. People need to realise that they can't carry on like this: refusing to change bad practice and expect tangible improvement. The also need to realise that the blame is not only on the IMF and EU institutions.The institutions should pay attention to the fact that the Greek people need to survive, while Greece should also understand why some countries more or less openly oppose to the third bailout: because they had to undergo some structural changes and harsh austerity measures to fight their crises, often at the expense of their citizens - by pushing them below the poverty threshold. Now, think of the sentiment of those people! They believe their governments should help them, rather than the "greedy" banks, let alone the banks of another country! Are they being selfish or even cruel? The blame is on their leaders, because they don't see the need for change of the neoliberal paradigm, enshrined in the EU and its acquis. Someone should start this process for change. For the time being it looks it's too much to handle, as everyone is overwhelmed with their own problems and sorrows. Empathy is a well-forgotten feeling, I'm afraid. That's where we are, IMHO.

  5. "Alexis Tsipras and Euclid Tsakalotos made the best decision possible in a dreadful situation. They should be commended for that."

    Regarding Tsipras, I find it extremely hard to reach this conclusion. If the story begins last week, sure... But I can't help this feeling that Tsipras (and Varoufakis for that matter) played a 5 month-long bluff on Europe and its own people. Varoufakis now claims Schauble expressed desired for Grexit long ago. And the greek government's response is to bluff their way through negotiations, going as far as calling for a last-minute referendum in which they claimed to its own people a "no" would strenghten their bargaining position? Unless he was realistically willing to accept Grexit (and Varoufakis alledgely was), Tsipras' strategy in the whole ordeal was disastrous.

    Disclaimer: not condoning some absolutely nasty vindictive behavior from the Eurogoup in the last few weeks.

  6. I have a couple of critical questions:
    How would the Greek Euro trade at par to the old Euro in Greece when it would not be internationally accepted? A major reason to implement a new currency would be to devalue to gain competitiveness. To achieve that the Greek Euro would have to be worth less than the original Euro and contracts would have to be rewritten to the new Greek Euro. Furthermore the ability to create such valuable Greek Euros by the central bank would be very limited as it probably would be expected to be an inflationary regime in which Seignorage is backloaded. I feel that the Greek Euro would either be a drachma or it would have to be backed with Euro 1-1 in which case it would be a Euro.

    1. There would be a huge problem with cross-border contracts. They would either have to be redenominated in Greek euros or form part of the at-risk FX exposure. As I assume no re denomination, the latter applies. This is a major part of my objection to Schaueble's scheme.

      Purely domestic contracts could simply be deemed to be in Greek euros.

      If there is no redenomination, then the exchange rate could be set to anything. It might be sensible to back Greek Euros with real Euros, but it wouldn't have to be at par.

  7. Someone who produces RT-style propaganda for xenophobes and nationalists like Farage and Le Pen shouldn't accuse others of sin bins, really.

  8. You know, what I am most impressed by, is the fact that nobody has dolled this crisis up into Gold(Euro)Finger, starring Alex Tsiripas as 007.

    I mean...dang, it wouldn't be cool with Schaubel telling strapped down Tsiripas "No, I expect you to die."

  9. Misc technicalities:

    - The banks were only semi-closed, online banking and cards worked (in a closed circuit within Greek banking), and businesses could still remit cash from the till to pay due electronic invoices. Technically it is only a problem for import/export businesses, and domestic businesses get the collateral damage but less than a full bank freeze would.

    - [citation needed] on lots of bankruptcies. This capital controls so far just froze the economy. Business stops or slows down, but productive capacity is untouched, it's not carpet bombing. As a business you get no(reduced) income but also no expenses outside of leases etc (assuming normal labour laws allowing skipping salaries during a crisis). The impact is clearly recessionary but by how much and how many bankruptcies depends on the path out and hard to estimate.

    - I expect the tourism impact to be positive this year and next. Most should come back after the normalisation of banking, and solidarity tourism from other Europeans appealed at how they were treated should boom.

    - The capital controls law mandated businesses to keep accepting (Greek banking) card payments. Many small businesses didn't. I think this contributes to kill the "Drachma can work" hypothesis. If the Greek government introduces a new currency, this likely means euroisation: people paid in the thing will most likely convert it to euros as soon as they get it, people paying taxes will do the opposite, and the euro (of which there is plentiful supply) will remain the street currency.

    - Schäuble's time out would probably suspend all euro official sector liabilities, so could sort of work in theory (Greece then operates on a balanced budget, no need for a surplus), though of course by keeping the mountain (and accrued interest) on the books this makes re-entry impossible unless the creditors fancy it and cancel/trim the mountain. The main point I think is legal: it allows de facto permanent Grexit while pretending to comply with treaties that don't allow it.

    - Final ELA suspension would most likely imply a Greek default on their aggregate Eurosystem balances, and they're net debtors, so they would come ahead on that (defaulted liability > lost reserves). Though that would get added to the mountain barring re-entry. Access to payments would be through forex (which balances flows) between the "Greek deposit units" thing, whatever they would become, and core/paper euros.

    - Yanis had a plan B of sorts (see the interview transcript in the New Stateman). His idea was to threaten default on the ECB and Eurosystem to get the ELA back. I think it would have failed as a bargaining move, and he would have had to execute (euroised) Grexit, effectively doing what Schäuble wanted him to do. I think Tsipras was wise not to follow him.

    - "Bank runs were inevitable": insight is a great thing, but I think it's a mystery why it happened at the referendum announcement time and not earlier (after the Cypriot bail-in, after Syriza's election, pick your favourite event). Keeping more than petty cash as a deposit in a Greek bank has been completely irrational for years now!

    1. My information from hours of discussion by phone this week is that all but petty economic transactions have ceased for 2 weeks, nobody pays rents, utility bills, taxes or social insurance, companies with money are struggling to pay their employees, and bankruptcies are already happening and set to escalate.

      The Greek economy became very open with the eurozone, which was a major error; it ended up importing fruit and vegetables from Turkey and South America, meat from Germany and other EU states, and exporting almost nothing. With the collapse of trade, it has had to become autarkic overnight. Any company that cannot do that is liable to collapse, and of course has already sacked its staff. We can expect to see an increase in what is already the highest unemployment rate in Europe.

      The lack of urgent effort by the eurogroup to address this crisis - at the same time as the arrival of 80,000 refugees in Greece this year and no financial support offered from Europe -- indicates that Europe couldn't give a rat's arse about Greece. Or refugees from Syria and Afghanistan, who are assembling in Athens with no food or shelter, and prevented from leaving Greece to reach a stable EU country.

      I saw an estimate today that the lost GDP for the last 2 weeks is about 3 bn euros. The damage done to Greece by the Troika is massive, and few believe it can now recover. The situation is just terrible. While Athens burns, Berlin fiddles.

    2. This is consistent with what I am hearing from my contacts in Greece. Thanks, Xenos.

  10. There is a view (to which I also subscribe) that the ECB is engineering a collapse of the Greek banking system, by refusing to provide enough ELA funding for them to reopen. This is seriously damaging the Greek economy even more, since all international transactions have ceased for 2 weeks along with almost all large domestic transactions -- including private sector rents and all public sector bills. Essentially, the Greek economy has almost collapsed and needs immediate ECB support.

    One Greek view is that the ELA limit was set in order to give an appearance of legality (many lawyers argue that the ECB governors are accountable in criminal law for their actions) while doing nothing. When the Greek banks collapse, the ECB will take them as collateral and sell them at a knockdown price to ... foreign banks. Germany will be in the front row of the firesale.

    I hope that this prognosis does not play out. If it does, that is the end of the EU. It is also likely to bring the post 1945 European peace to an abrupt end. As always, we will have the Germans to thank for this.

    1. Well, the ECB selling Greek banks would be difficult, as they do not belong to the ECB. How is that going to work? Getting the Banks as collateral?

      The only collateral the Greck Central Bank has (on behalf of the ECB) is bonds issued by the commercial banks, and other security, they are worth nothing if the banks collapse. If they are worth something, I do not think the Greek Central Bank, will hand them to the ECB voluntarily.

      The ECB could sue, but the Greek Central Bank would have "lost" the collateral, by the time the bailiffs arrive, it cannot find the collateral any more, if the ECB wants it. The situation is not going to be "friendly", should the ECB want to enforce its collateral for ELA, we can be sure of that.

      In case something goes wrong with the banking sector in Greece, and there is a Grexit, and a a new currency and devaluation, the ECB will have to say good-bye to about 120bn which it currently is pumping into the Greek banking system..

    2. Thanks, Matt. Well, I hope you are right. I guess the fear is that the Bank of Greece will hand them over: Stournaras is on the Board of the ECB (as are all central banks of the EZ) and the Bank of Greece is out of political control.

      My personal view is that the Greeks should take back control of their central bank. This mess of independent central banks has got out control, with far worse results than politicised decisions ever had. That probably goes against the rules of the EZ, of course. The neoliberal machine par excellence, as it turns out.

    3. This comment has been removed by the author.

    4. Matt, Xenos

      Some factual errors here, I'm afraid.

      1) The principal collateral pledged in return for ELA funding is Greek government debt and loans guaranteed by the Greek government, not "securities issued by the commercial banks". Bonds issued by a bank are its liabilities, not its assets, and therefore not acceptable as collateral.

      2) The Greek central bank is not independent. It is part of the Eurosystem. It is best regarded as the "ECB-in-Athens". It is answerable to the ECB not the Greek government. So I consider it highly unlikely that the Bank of Greece would conceal collateral from the ECB.

      Having said that, the risks and costs of ELA rest with the national central bank not the ECB. Should the Greek sovereign default, the Bank of Greece would lose a lot of money. Whether this would rebound to the ECB is a matter of some dispute.

      I concur with Xenos. The Greek government should take back control of the Bank of Greece. But yes, this does contravene EU rules.

    5. Frances: many thanks for your (as always) detailed knowledge and insights. Banking remains a complex and poorly understood area in economics, and has emerged in recent years as central. Many of us feel very ignorant of its operations. Your blog is a Godsend!

  11. How about the option of Greece opening it's economy to banks from other euro nations?

    I think this option is already available for more sophisticated Greek depositors who can cross borders or use electronic banking. That same option should be made available for less sophisticated, ordinary depositors.

    1. I'm not sure what you are complaining about. The Greek banks are fully interconnected with global transaction networks.

      If you mean setting up foreign banks in Greece, they do exist (although most left in recent years). As far as I know, Greek banking law is that of the 1980s (from Andreas Papandreou) and requires assets to be lodged with the Bank of Greece, and foreign banks to be established not as subsidiaries but as foreign banks based in Greece. To be quite honest, I consider this to be a good thing, since it impedes the dirty manipulations that banks engage in. It is all a moot point now, as the Germans have more or less destroyed the economy and the banking system.

    2. My understanding is that it was the central bank of Greece that was considered no longer solvent. The Greek consumer banks seem to be extensions of the central bank of Greece.

      Had there been banks based in another euro nation present in Greece, would they have been forced to close like the Greek banks? Presumably, such a not-Greek based bank would not have been subject to the same lack-of-confidence bank run.

    3. Well, the basis of the Greek banking system seems to be (historically) that the central bank as the lender of last resort is financed by the State. The current problem has come about because of the effective bankruptcy of the Greek State, so the BoG has to be propped up by the ECB. Which does it very halfheartedly, hence the bank run. In fact, the ECB has caused the bank run. It has failed in its duty to preserve the banking system of the eurozone.

  12. "A "time-out" would presumably be implemented by removing ELA from the banks, forcing them to relinquish their Euro reserves, and possibly also by suspending its membership of the Target2 international Euro settlement system, although as Target2 includes among its members four non-Euro users, this would be politically problematic. But removing ELA would be sufficient to exclude Greece from Euro membership."

    No, No and No.

    You cannot force the Greek banking sector to sent the Euro reserves back to the ECB. That money is out. Gone. It is a bad debt for the ECB, should the Greece decide to leave.

    Frances, I am not going to take issue with individual points.

    I just have a completely different view.

    Please have a look at my blog, the last three entries, which talks about Greece doing a soft shoe shuffle out of the Euro, become like Montenegro. Have the Euro, but are outside the Eurozone.

    Then, by taking over responsibility of the Greek Central Bank from the ECB, Greece could just repay its debt in its own currency. it would change overnight from insolvent to solvent!

    Finally, I think the ECB have been criminally negligent, not providing liquidity to banks, thereby increasing suspicion about their solvency.

    I would much appreciate, if you had a look at what I say in these posts.

    Schaeubles idea of temporary Grexit and re-entry is rubbish, as anything else, which comes out of the German Ministry of Finance. It is almost not worth wasting precious blog-words on it.



    1. Matt,

      I too am not going to take issue with you on individual points. I would point you to the word "temporary" and ask you please to note that Schaueble's plan presupposes the following:

      - no default
      - Greece remains a member of the EU and therefore subject to the jurisdiction of the ECJ

      I'm afraid therefore that pulling ELA WOULD be the mechanism used to exclude Greece from the Euro. It would be done by raising the haircuts on collateral posted at the BoG to 100%. That would leave Greece with no choice but to replace the reserves with a new currency.

      Any "time-out" proposal that does not replace reserves with a new currency is not temporary Grexit. It is simply extension of the situation since 28th July.

    2. "It would be done by raising the haircuts on collateral posted at the BoG to 100%. "

      Yes, the ECB could do that, so basically the ECB would say you cannot get NEW ELA, because we will not accept any collateral (which is the same as collateral haircut at 100%)

      But for he existing collateral, for the OLD 90bn ELA already out in the Greek banking system, that would not change a thing. That was agreed on previous terms, on previous collateral haircuts, which were less than 100%. That money is out, funded by the ECB. There is no "margin call" on existing collateral to ECB! It is individually agreed on a case by case basis, and the terms agreed will stand for the term of the agreement.

      So basically no new lending could take place in Greece, if the ECB said no more ELA, unless deposits would fund that lending. We would have a banking system without a Central Bank as lender of last resort.

      That does not mean it would not work. The banking system could even make more loans, as deposits come in to fund the proposed new loans.

      Deposits flooding back into the Greek banking system would of course happen, if the Government made the Greek National Bank independent, announcing that a new currency would be out of the question, Greece's currency would remain the Euro forever and ever. And nobody could force Greece into a "temporary" exit of the eurozone, because it would already be out of the Eurozone. It would still have the Euro, though, as its currency!

      Then deposits would flood back. Banks could lend,

      And with an independent Central bank that could be done.

      Now you say the EU would take Greece to the European Court of Justice, because of what? Because it has rescued its banking system from certain collapse?

      Because it has rescued the savings and assets of its citizens denominated in Euro, which would certainly be devalued in an unstructured scramble for a new currency which nobody has planned for in a "temporary" exit from the Eurozone.

      Temporary Grexit idea form Schaeuble is a non-starter, he will be replaced sooner, than that idea is being put into practice, and the idea will go down as one of the worst in German history. (And there is some competition!)

    3. Sadly no, Matt, the ECB can tighten the collateral requirements for existing ELA. Indeed there has been some discussion about whether it should do so. Tightening collateral requirements is the same as a margin call - either the bank finds additional collateral or it coughs up cash.

      However, I agree with you that the real problem is that the Bank of Greece is not independent. This has been a consistent theme throughout the comments on this post. It is clear that in any Grexit scenario, the Greek government must gain control of the central bank. Once that control is established, there would be a number of alternatives open to it.

    4. If Greece wanted to be like Montenegro it would have to exit the EU, not just the EMU.

  13. Totally agree. It's important, for the future of the EU, for all parties (including IMF) to do what everyone knows is Priority 1: get to sustainability. The precedents that are set now (in that process of determining the path to sustainability) will be important for many countries/crises to come.

  14. Let's be in no doubt here: if Greece goes down, we all go down, with all the implications that has for asset prices everywhere, including bonds, stocks, commodities - and yes, even cash in the bank. After all, who's going to bail out your bank if your government's bankrupt?

  15. The fact that banks open on monday shows that there was no need to close them at all. It was all orchestrated by ECB to pressure Greece's government. This shows how dysfunctional the EMU really is, unelected mandarins shutting down the whole banking system of your country and pressuring democratically elected governments. I guess you would have imposed capital controls so that the banking system could operate even without ECB ELA. It seems you can never win that one, they could have limited the ELA even more. There is a financial company in Greece that is taking ECB to court over this.

  16. The Greek Banking system was destroyed via the PSI which was a contrived/calculated act of ceding control to Brussels and Berlin. From that point on the Greek banking system remnant became the favorite lever of destroying Greek sovereignty and applying brute force by diktats.

  17. Frances:

    IMHO this is an incorrect statement:

    "If it increased liquidity, it was arguably supporting the Greek government. If it reduced it, it was supporting the Eurozone creditors. It therefore did neither. Maintaining ELA at its existing level was a politically neutral decision."

    The imposition of ELA as the only way of providing liquidity to the Greek banking system going all the way back to Feb'15 was not a neutral act. It immediately created an additional burden at a cost of 150 basis point higher than prior.

    Notwithstanding such partial act, it then failed to provide a counter to Berlin's "starve out" strategy. Everybody knew that the Greek government would not have extra cash for maturing loan rollovers and Draghi simply stood there and watched as if a bystander.

    You can't call something akin to dereliction of duty as an act of neutrality. Not if you are remotely following the Corinthian Spirit.

  18. Frances,

    "1) The principal collateral pledged in return for ELA funding is Greek government debt and loans guaranteed by the Greek government, not "securities issued by the commercial banks". Bonds issued by a bank are its liabilities, not its assets, and therefore not acceptable as collateral."

    Vaorufakis explained in a German TV doc that it is exactly like I say, that is where I got the info from. THe Greek banks have run out of collateral, but they now issue bonds purely for the purpose of having collateral to give to the ECB. Anybody holding collateral (bank bond) has of course an asset, as will the ECB, who accepts this asset, to secure another asset by the bank (for which the ELA advance is given)

    "2) The Greek central bank is not independent. It is part of the Eurosystem. It is best regarded as the "ECB-in-Athens". It is answerable to the ECB not the Greek government. So I consider it highly unlikely that the Bank of Greece would conceal collateral from the ECB."

    Govenor can be sacked and will be sacked if the proverbial hits the fan and he does not co-operate with the Greek government. And then, co-operation will stop wiht the ECB, and the ECB can come looking for their collateral, if they dare! That will be the situation!

    "Sadly no, Matt, the ECB can tighten the collateral requirements for existing ELA. Indeed there has been some discussion about whether it should do so. Tightening collateral requirements is the same as a margin call - either the bank finds additional collateral or it coughs up cash. "

    They can, as they seem to be making up rules as it suits them, to crush the Greek banking sector, That is not in line with their mandate to ensure the functioning of the money transmission system!

    Somebody above says a Greek company is taking the ECB to court over its conduct, good, there are many others who say, they are not doing their job!

    (ECB is trying everything to survive here, when it is them, who should really be liable for the Greek debacle. !!!!)

    1. The Governor of the BoG cannot be sacked. He is appointed for a fixed term and cannot be removed, is my understanding. Of course, the government in power at the time will appoint the replacement, but this is a very very distant form of political accountability. Very neoliberal.