February 19, 2015

The stakes are sky high if EU calls Greek bluff

Posted in Irish Independent · 55 comments ·
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Will the EU torpedo Greece? Will the ECB cause the Greek banking system to collapse? Will forcing a Europe-inspired bank run make it any more likely that the Greeks will be able to pay back more debt? What do you think? The short answer is: of course not.

Therefore, to improve the situation the EU authorities must do a deal because the sanction they are proposing will cause yet more money to leave Greece. This is the opposite of what they want. They want money to flow into, not out of, Greece.

Right now, Greek banks are facing the same problem the Irish banks faced in the summer of 2008. They are experiencing what is called a silent bank run. Big deposits are leaving and soon small deposits will leave, unless a deal is done. Why would deposits leave?

People who have their money in the Greek banks believe that if they wait to take their money out there will be no money left in the vaults. They also remember what happened to their Cypriot cousins during the last year. Back then, the ECB ordered the expropriation of deposits to pay for the sins of the bankers. The average Greek has seen this film before and knows how the story ends.

The ECB – the lender of last resort – is propping up the entire system. In normal times, if you are a Greek depositor and you rock up to a bank and demand your €10,000 deposit in cash, the Greek bank goes to the Greek central bank and exchanges IOUs of the Greek government which have a face value of €10,000 for cash which the bank then, gives to you. The way the Greek central bank used to get money is that it swapped its Greek government debt for Euros at the ECB. However, two weeks ago the ECB said that it would no longer accept Greek government bonds as collateral. This is a major shift. The ECB said that Greek government IOUs are too risky as collateral.

In fact, the Euro politicians have made getting EU funds conditional on the Greeks agreeing to another Troika-style economic programme. This is precisely what the new Greek government has been elected to oppose. If they drop all their electoral promises now, democracy will be subjugated to technocracy; the Greeks – who put the demo into democracy – aren’t having any of that. So we have an impasse between technocrats and democrats. Indeed, the Greeks can argue with some validity that they have already cut enough. Greece, unlike Ireland, is actually paying its way day to day. We are not, yet. So what does the Greek central bank do to ensure that the Greek punter gets his deposits? Here is where it gets interesting and here also is where the Greeks may have an ace. At this stage, the Greek central bank is able to simply print money in exchange for Greek government IOUs – as long as the ECB allows it to do so. If the ECB governing council says that Greece can’t print money, it is tantamount to kicking Greece out of the Euro because the only way the Greek banks can get their hands on euros is for the Greek central bank to print Euros that are technically counterfeit notes.

Would the Greeks do this? Why wouldn’t they? What’s to stop them? Surely after everything the Greeks have been through, a few central bankers in Frankfurt wagging their fingers at them isn’t going to terrify them. The alternative is that the Greek public realises that there is no money in the banks and there is a full-scale bank run. In order to stop this, the Greek central bank would have to limit the amount of money a Greek depositor can take out, for example €1,000 a day. This cap is a capital control and it goes to the very heart of monetary union. In the monetary union, an Irish euro is supposed to be as good as a German euro, which is meant to be the same as a Greek euro.

But if there were capital controls, then that wouldn’t be the case. Greek euros would be trapped euros, imprisoned in Greece. This is the tipping point. The problem now, as the politicians squabble, is that the tipping point will not be driven by political summits or political agendas but by the fears of the Greek depositors. What would you do if you were Greek? Panic? Once the people panic, it’s all over and no amount of talk will stop it. The only thing that can stop a bank run is actually money in the ATMs. If you rush to the ATM fearing there is no money in it and there’s loads of money coming out, then your fear evaporates. You then call your mate to assuage his fears and so on. But if in contrast, there is no money or not as much as you want to take out, your fear heightens and you tell everyone and this is how a bank run happens.

If the country experiences a bank run, then there is no hope for it because the economy seizes up completely. People hoard the money they have and there is no commerce. It is not hard to see how the EU has only one strategy in Greece – the nuclear strategy. If it presses the button, who knows where this ends?

At that stage, the Greek government may consider the possibility of leaving the Euro – not because they want to, but because the rest of the club doesn’t want them, and the timing of this move again will be determined by events.

I don’t think this will happen. Conventional wisdom suggests that a deal will be done. However, it is worth considering what the great US economist JK Galbraith, who coined the term, observed about “conventional wisdom”.

“Conventional wisdom is rarely changed by some countervailing idea that convinces everyone to change, but by the great march of events.”


  1. DarraghD

    So the Greek strategy could now literally be, “We’re gonna print away cash here to keep the ATM’s fed, the only way you’re gonna stop us doing that now is to send over a military detail with the aim of forcing us to pull out the plug on the minting machines?!?

  2. SMOKEY

    The destruction of your own country is well and truly underway. Never mind Greece, you wont know this place in 10 years time.
    https://www.youtube.com/watch?v=DQcNOgXWfeE

  3. Con Burke

    Looking at the long-game, it might be better to just let this whole thing explode now. There will be a lot of pain, but stop the meddling by third parties. Let creditors crystallize their losses, let debtors clear their un-payable debts, on a worldwide scale. It will never happen, but this is what the world economy needs. Why does this whole thing feel like a game, to people who are pulling all the strings?

    • sdempsey

      The Greek finance minister appears of the opinion that if the Eurozone kicks Greece out then they’re likely to bring about its destruction anyway. He may be right but I’m more of the opinion that we could end part of a totalitarian supra-state where the powerful countries dictate economic and social policy to the weaker ones while threatening to bankrupt them if they don’t comply. Too late, already there.

      • Deco

        Greece needs to leave the EU.

        Because if Greece leaves the EU, then that would free them from the nonsense from Brussels.

        Greece might leave the Eurozone, but the Drachma will need to be quantified in Euros. So effectively, it will not be that different.

  4. woodsey

    ‘Beware the Greeks bearing gifts!’ … or proposals, for that matter! ‘Conventional wisdom’ needs to be exercised, (& probably will?) before ‘the great march of events’ catches up. Reforms, such as the Greeks supporting themselves, need instigating, just as they do in other nations but, this takes time. A further saying regarding the extraction of blood from stones comes to mind, along with its, so far, proven futility.

    • Colin

      Far more important to beware of socialising the bank debts on to the people and to beware of austerity foisted upon your shoulders by unelected undemocratic Eurocrats.

      • woodsey

        @ Colin – Yeah, think it’s what I probably said? It’s possible to ‘foist’ but, the ‘blood from stones’ reference kinda then becomes applicable?
        Think they may mostly be elected, overly democratic and all ours, I’m afraid!

  5. Colin

    Where are the big Greek deposits moving to? Switzerland? I know that the Italians used to hop in the car and cross the border to lodge their deposits in Swiss banks in times of crisis before, but how do the Greeks get there, I mean its a long drive from Greece, with dangers and mafia and bandits at every turn.

  6. Deco

    This “crisis” is proving insightful. It I telling us everything that we need to know about the English speaking financial media, and that they represent the agenda of the richest 1%. And that provide suave sophisticated representation for policies that serve big finance.

    1. When Greece was looking unable to pay PRIVATE sector creditor, the world was going to end if Greece was not shoved into a bailout.

    2. Public sovereign debt facilities, in other countries rushed to provide Greece with debt, therefore “providing a remedy”.

    3. Greece was still just as risky, but the private sector creditors got a “bailout”. And the media sounded the trumpet of success.

    4. Greeks were shoved into an “austerity program”, on a loaded moral pretext. Because everybody was told that the problem was the Greeks. Therefore the Greeks should be punished. It was a “correctional facility” for the Greeks. And it was done in the name of Merkel. (when really it should have been abundantly clear that the EU was pushing this).

    5. Several EU countries continued to borrow hand over fist on the basis that the problem had been contained. (Ireland, Italy, Portugal , Belgium, and Spain being examples in particular, where debts are completely unsustainable).

    6. Greeks respond by electing political options that were not getting “most favoured status” from Brussels. In fact the EU did everything it could to support local quisling filter options. The was a “project fear” establishment response before the election. It failed.

    7. The Syriza analysis of the role of the media in ensuring control of the political options and their progress has proven insightful. A bit like what happens here with respect to RTE, and the EU alignd bloc of FF/FG/LP/GP.

    8. Politicians in other EU countries are aghast at Syriza, and will do nothing to help the Greeks. In fact in Spain and in Ireland, politicians will sell out their own people, before their undermine the standing of their political dynasties, and the credibility of their political machines. The biggest enemies that the Greek government faces are mainstream Spanish, Irish and Belgian politicians. They need to punish the “bad example” being set by people who are leaving their political formulae.

    9. The English language Financial press have declared that the Greek problem is no longer as serious (because I there is no a default, it will be paid for, by taxpayers). SERIOUSLY ??? It was a crisis when the private banking creditors were getting scelped. But now that the taxpayers are being stuck with the bill, it is OK.

    10. Ireland’s public deficit continues to mount. Ireland’s institutional state has grown out of control. The Brussels aligned bloc have no intention of reforming the extravagant state system, because it is a reward mechanism for canvassers and long term engaged servants of the party machine. The austerity program in Ireland consists mainly of tax increases. There have been no culls of the quangos. RTE, FAS, CIE, etc are still happily dysfunctional and largesse loaded.

    11. Meanwhile the EU’s economic program is still about further ponzi-fication of the real estate sector. There is an extremely dangerous housing bubble in Scandinavia. If anything, it even worse than the Irish bubble ten years ago. Likewise there is a real estate bubble in NL and Germany.

    This is completely unsustainable.

    12. What if Syriza are telling the truth about debt, about the failure of EU policy making, and the failure of the entire centralization project in the EU ?

    [ and more to the point, are we really a democratic free society, when we have no open discussion about any of the valid, and well thought out ideas that Syriza proposed to the Greek people ?]

    • No such thing as a free market Deco. Hardly any such thing as a free press in the West. News and discussion is better from Russia than the US. How things have changed.

      Lets hope the Greeks hold their ground, but I doubt it. This will unfold until the whole mess collapses.

      • Deco

        Greek just happens to be “at the front of the debt wave”.

        A consequence of democracy, emigration out of Greece in the 20th century, corruption, and the fact that Greece was the first country in SE Europe into the EEC (which increases the corruption level in a society, by institutionalizing it, and then under-reporting it).

        Belgium, Italy, Spain, and Portugal are also in a very serious state.

  7. dontdoit

    The Greeks have made a serious strategic mistake. Namely, not putting in capital ie. bank account withdrawal controls from the moment they took office.

    • Mike Lucey

      I’d say they thought about doing so but then thought why should we when its an ‘ace’ to be played as DMcW says.

      Its one big poker game and the best bluffer could be the ultimate winner not the player that holds the best hand. As I said in a previous post, even Paddy Power hasn’t figured out the odds as to what will happen.

      BTW, according to Paddy Power we will see Enda as our next Taoiseach and Micheál as his ‘side kick’ Tánaiste! I think I may well take that bet ;-)

  8. CorkPlasticPaddy

    I said it before and I’ll keep on saying it. Everything has gone ‘tit’s up’ since the EEC became the EU!! The Germans and others have totally fucked everything up for every body else. The Germans along with the faceless Eurocrat’s over in Brussels should be told in no uncertain terms where to go. Fair play to the Greeks!! The whole sorry mess that is now the EU should be brought crashing down around the relevant ears and it would be their own fault and no body else’s!!

  9. Codex

    ‘…….The great March of events …..

    The recent beginning of the present waxing of the Full Moon showed us ‘the Eye in The Storms ‘ as in Sexton and Noonan . In both cases nobody saw what was coming and the speed of light changed everything . Galbraith recognises the gravity of the Full Moon and coined its moments as above .

    How this great march will proliferate in the EU depends how close to ‘the eye’ we are and what ‘the eye sees’. Of course who are ‘we’ ? Or who do we want to be ?

    The Greeks are playing the forces of events and will continue playing bluff to the 3rd March because they know they can cause the greatest destruction during this dangerous moment .And they will if they have to .

    The great march of events continues later in MARCH because for the next full moon on 4th April we have a very rare worldly biblical event as in the ‘blood moon ‘ , the ‘full moon, and ‘the feast of the passover ‘and an Eclipse between the Moon and the Sun ‘ . And then came DARKNESS .

  10. jccusack

    “If they drop all their electoral promises now, democracy will be subjugated to technocracy;”

    So a government can sign a contract, and then walk away from it because of a public vote? Democracy has rules, and the rule of law is a fairly core one !

    • Colin

      A NEWLY elected government can walk away from previous government’s tyrannical commitments. We expected Fine Gael to do this (stop the socialising of bank debt) when they were voted into power in 2011, remember the ‘not another red cent’ statement by Leo ‘the lion’ Varadkar?

      However his government ducked this tough call, and walked into Principal Merkel’s office tugging its forelock ready to take whatever it was gonna take up the ass for Ireland. Meanwhile government partner Pat Rabbitte has since cleared it all up for us, explaining that election promises are meaningless [unless they are Greek election promises]!!!!

      • jccusack

        Cheers Colin,
        I understand your frustration, but not in agreement. Let me say why and then broaden it out.
        The ‘This contract ceases after the next election, if we say so’ clause does not exist. Yes, a new government can walk away, i..e break, from an Ireland Inc or Greek Inc contract. Unfortunately the consequences for getting new contracts are not great over the medium to long term. The ex Argentinian finance minister regrets walking away from their debt contracts…and more importantly so do their long suffering population.

        As much as I would like the short term benefits of no cuts for the past few years, living in a country where the large employers don’t trust that we will be in the Euro for the long term, or we damage their ‘brand’ etc etc would have significant employment consequences over time.

        Your comment does raise the issue of us, me included, believing what people with little integrity say when they are in an election process.

        We elect people with little time to dedicate to governing, of varying degrees of ability, who are really good at telling us what we want to hear rather than what we need to hear…followers rather than leaders.

        • Colin

          jccusack,

          Thanks for your response. There ARE Precedents. It is called odious debt, ‘…….The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.’

          Iraq under Saddam, Haiti under Duvalier and Mexico under Maximilian were despotic tyrannical regimes. They were overthrown and the people who elected a NEW government did NOT have the debts of the previous regime saddled to them.

          http://en.wikipedia.org/wiki/Odious_debt

          • woodsey

            @Colin – Ehm, don’t think the lenders have committed any ‘hostile act’ by acceeding to the borrowing requests of nations, for funds that form the basis of trying to meet the standards the voters expect.
            No EU nation has freed itself from a ‘despotic regime’ in the recent past.
            They all have had elections, the outcome of which doesn’t always result in an overthrow of the old regime.

          • Colin

            woodsey,

            Greece has recently freed itself from an inept ‘not quite a despotic regime’ government who could not serve it’s people, and could only implement a foreign based austerity programme which hurts its young people in particular. I would count that as being in the recent past. Let’s see what happens now. If Greece get’s a massive writedown and its economy rebounds following that, won’t you be looking for a similar deal for ourselves? Or will you continue being the austerity martyr and look on with envy?

            Credit is like a drug. We know of drug dealers who supply drugs to vulnerable people who eventually become addicts, and the dealers give them credit up to a point, when suddenly they call in the debt at a time of their choosing. The addict can’t pay up, so he is asked to do a favour, like transporting drugs, keeping drugs for safe keeping in their own house or some other kind of gang related criminality. The addict is caught by Gardai, gets convicted and goes to prison to pay for his crime. I would call the gang’s actions a ‘hostile act’ on the man in prison, don’t you?

          • jccusack

            I respect your opinion Colin. Lenders who lend to non-democratic states should bear the downside, I agree. Was unaware Greece was in the camp.

            Would you add ‘Ireland under Ahern’ to your list ?

          • Colin

            jccusack,

            Ahearn was corrupt. Cowen was a drunkard. Cowen lost his moral compass in the haze of inebriation, and his fellow cabinet members were just as bad, if not worse.

            The despotic call came on Cowen’s watch in September 2008. Lenihan was just as bad, if more sober and deluded rather than drunk.

            Gormley got the call at 3am looking for his blessing, and couldn’t be bothered to ask the most basic questions about it, and went back to sleep which he deemed to be more important.

            Remember the heads of BOI and AIB together marched into the Government Offices and put a gun to the head of our so called government of the people, demanding that their banking interests and bondholders be served first, before the people of Ireland. So, in that sense, yes, it was a Despotic regime.

          • Mike Lucey

            @Colin

            “Ahearn was corrupt. Cowen was a drunkard. Cowen lost his moral compass in the haze of inebriation, and his fellow cabinet members were just as bad, if not worse……….”

            Mmmmm, now that you put it that way I think there could be a case!

          • DB4545

            Stephen Kenny. I get connections. However the man is a multi-billionaire and people need to make connections to him not vice versa. Anyone with the money makes connections with every fresh crop of politicians by funding donations where and when it counts. If you’re looking for fresh and bright business talent you can hire a freshly minted MBA who is eager to please as a gun for hire. Why would any businessman spend money on a discredited political has been unless it serves some interest?

        • DB4545

          Imagine you own a large company (like Topaz or the Beacon clinic for example). Would you hire someone for your business team (like a former Taoiseach for example) who hasn’t exactly demonstrated financial genius in his decision making? It seems bizarre but if you’re not hiring for business acumen what exactly are you buying? Silence perhaps?

          • StephenKenny

            Connections. In high places.
            In the world of ‘too big to fail’, the correct connections are all that matter.

  11. michaelcoughlan

    Hi,

    “Will the EU torpedo Greece? Will the ECB cause the Greek banking system to collapse? Will forcing a Europe-inspired bank run make it any more likely that the Greeks will be able to pay back more debt? What do you think? The short answer is: of course not”

    I am not so sure. The evidence is that they are already pulling the plug out from under Greece. If they know that the greeks can’t pay then better to bring the whole sorry mess to a head so that the ECB can exercise any liens or any of it’s subsidiary banks exercise theirs on any Greek collateral used to back the loans.

    The Greek government already fired all the honest Generals so its like you said; The march of events will determine what happens next.

    Michael.

  12. Adelaide

    “Germany rejects Greek loan request”

    Latest news update from BBC.

    “Germany has rejected a Greek request for a six-month extension to its eurozone loan programme.”

    http://www.bbc.com/news/business-31532755

    • michaelcoughlan

      There you go David.

      It could be brinkmanship or the Germans may actually want the Greeks out. The main reason they may want them out is because if the are out they will have to sort their own monetary/currency crises.

      If Germany forces Italy Spain and Poluba to go the same way then that will out-manoeuvre Draghi who wants to print his way out of the problem as there will be no need to print money for the Pigs.

      The German banks will then exercise their liens on Greek assets and bleed that country dry to protect their own balance sheets. The Germans of course have the panzers to do it too and make sure it happens.

      If I was a German and I was trying to defend the fatherland from a head case like Draghi that’s what I would do. You should play the video of yourself advising miriam on prime time that it was advisable for Draghi to buy everything not tied down in the current context.

      Michael.

  13. One of David’s erstwhile contributors to Kilkenomics, with his two-penneth:

    “Greece Should Not Give In to Germany’s Bullying”

    https://foreignpolicy.com/2015/02/19/greece-should-not-give-in-to-germanys-bullying-euro-syriza-merkel-varoufakis/

  14. Pat Flannery

    Congratulations to Yaris Varoufakis and the Greek people. They have given us all hope that democracy is not dead. The big boys blinked. Greece has demonstrated that the Troika is not all-powerful after all.

    Let’s hope Yaris & Co’s historic stand is not betrayed by fellow Greeks as Leonidas was at the Pass of Thermopylae.

    • That’s a very generous interpretation Pat.

      To my eyes they have just kicked the can down the road for another 4 months and nothing has been achieved.

      I just hope Yanis is doing it to buy some time so that he can shaft the EU fascists in June when it all blows up again.

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