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20 February 2015

Greek tragedy or bright future?

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Will the Greek Fiat 500 insist on crashing head-on into the 50-ton tank – losing the game of chicken?


The stand-off between the Greek Government and the Eurozone is heading into its final stages. The liquidity situation of both Greek banks and Government is becoming critical so they must strike a deal that the Greek side can deliver in its Parliament – or adopt a radically different course.

The ECB has just raised the ceiling for ELA by €3.3 billion and that may have been calibrated to last to the end of February – only a few days away. It seems that tax revenues are falling short of expectations as the offer of settling arrears over 100 months has produced the entirely-foreseeable result that citizens have awarded themselves a period of grace before making any payments.

Any failure to agree a deal by the end of this weekend must surely raise the spectre of a depositor panic that will be difficult to stop. The obvious solution thereafter is for the Central Bank to use its powers to impose a “bank holiday” while the Government puts bills through Parliament to impose administrative controls on withdrawals from banks in Greece. Such a step only needs permission from the Commission and not the Member States. 

Bank subsidiaries and branches outside Greece: At end-2014, Greek banks had non-bank funding of about €34 billion outside the euro area. There are branches and subsidiaries in both London and New York so the authorities there must be quite nervous about the fate of depositors under their protection. Aggregating bank and non-bank deposits, they seem to be about €10 billion larger than the assets.  It is reasonable to expect these authorities to take early and swift action to take operational control if the deposits are at such obvious risk.

It is possible to argue that contagion-free problems for Greece can be used by many politicians around the euro zone to illustrate the benefits of prudent fiscal policies and a functioning market economy. As France, for example, struggles to liberalise its economy, Greece stands as a dreadful warning of the long-term results of avoiding the necessary steps to make an economy competitive again. The reminder may be particularly forceful at this stage of the European Semester when Member States are having their budget proposals scrutinised to ensure that the plans realistically put them on track for fiscal prudence.

However, the Greek case also carries existentially high stakes for the eurozone. If the Finance Ministers agree a weak arrangement that does not actually crystallise, let alone be fully implemented, then why would any state in the future worry about the entire panoply of the new economic governance arrangements when the minsters have caved in at the final moment and disbursed their taxpayers’ funds freely to whoever shouts vague promises loudly.

The credibility of the Syriza government is very weak as it is all too apparent that they promised electors actions that any analysis at the time would have shown to be very difficult to achieve. Did they do that analysis thoroughly beforehand? Even now, have they really analysed the situation that could materialise as early as next week? That may not suit `game theory’ professors but they must surely have been given a crash course in how the financial system actually works in all its practical details. Does 36% of the vote really entitle Syriza to drive 100% of the electors into a spectacular `car crash’ with the economic equivalent of a large tank?

Read more on the impact of the Greek crisis on the Eurozone and on possible scenarios after talks today:

Full article for consultancy clients

© Graham Bishop

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