February 19, 2015
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.”