Archive for May, 2012

While the punters speculate on the outcome of the Greek election on 17 June, in truth ‘Grexit’ is already happening. Because of massive withdrawals from the Greek banking system, the country is on emergency life support from the ECB. First, following the inconclusive May elections, the ‘troika’ decided that it would postpone the €48bn recapitalisation payment until after the June election. Then, a fortnight ago, the ECB stopped accepting collateral from the Central Bank of Greece (BoG) for several of Greece’s major banks. This collateral is required for weekly refinance operations required to keep the country’s private banks liquid.

In consequence, the central bank has had to seek €100bn from the ECB’s Emergency Liquidity Assistance (ELA), whih is slowly being chanelled to four major private banks. The difference between money received through the ‘normal’ ECB refinancing channel and the ELA is that, in the former case, the loan from the BoG to the private Greek banks is guaranteed by all ECB members while in the latter case it is guaranteed by the Greek state. In the words of one commentator, ‘think of what this means about keeping your money in your local bank?’ Or in the words of another:

“Essentially, ELA represents the ECB passing the risk back to the sovereign. That could be the trigger for potential default … ”

Some think that Greece’s departure may be a good thing. The arguments are familiar enough: first, Merkel and her allies want Greece out ‘pour encourager les autres’. Secondly, a numbrer of prominent economists (eg, Nouriel Roubini) believe Greece will benefit from leaving now rather than later. With Greece gone, a deal can probably be done between Merkel and Hollande over Eurobonds or (minimally at least) ‘project bonds’. The latter would be construed as a victory for the anti-austerity camp. Until recently, that is certainly what I had thought.

As Martin Wolf and others have noted, Greece’s disorderly departure will in all likelihood shatter faith in the Eurozone forever. Given the slow motion bank run in Spain, a Greek bank run will almost certainly trigger massive flight from the single currency. We shall not return to the comfortable prosperity of post-war Europe soon or even later—in all probability, that world has now died.