It's the thought that counts

The action so far:  Greece borrowed a third of a trillion dollars.  It's been obvious for some time it neither would nor could pay it back.  Despite the best efforts of a lot of financial and political whizzes to obscure the issue in a series of "extend and pretend" paper blizzards, the issue came more or less to a head last week as the issue suddenly became concrete and unavoidable:  the Greek banks have been closed for a week.  Only little trickles of cash were available from ATMs, and that perhaps not for long.*  Suddenly foreign banks aren't just the guys who are demanding payments any more:  they're the guys with the buckets of cash that are needed to fill the ATMs back up.  Greece faces the prospect of having to consume only what it can produce locally.

The fascinating thing about the bank closure is that the issue no longer is about whether Greece will pay back its loans; of course it won't.  Four or five years ago, when it became obvious no such repayment would ever happen, the private lenders mostly sold out of the Greek debt and left it to the central banks.  It's now a political issue: will governments, especially Germany, soak their taxpayers for new cash to subsidize Greece's living beyond its means indefinitely?

This being an extremely uncomfortable question, not to mention one that will inspire Spain, Italy, Portugal, and perhaps France to demand similar subsidies, all efforts are now being directed to creating the illusion that the corpse of the Greek debt is still dragging itself along by its fingernails.  Everyone is frantically trying to preserve the impression that they are dealing responsibly with a troubled debt instead of deciding whether to pour shiny new Euros into the international project of making Greece a permanent welfare queen.  Bloomberg has laid out an impressive array of squid ink available to ECB officials in this effort:
Greece won’t leave the euro overnight. But it may face face three or four weeks of increasing pressure to start printing its own money.
That’s because Greek banks might soon be unable to meet European Central Bank demands for the collateral needed to keep access to Emergency Liquidity Assistance [a/k/a German cash subsidies], and the Greek government would run out of cash to pay its bills and workers....
[The ECB's] bank supervision arm will decide how to value the government-backed assets held on Greek banks’ balance sheets. Meanwhile, the central bank’s monetary policy arm will consider whether to object to collateral that lenders post to gain ELA [German cash subsidy] access from the Bank of Greece.
... Then, the banks would get calls for new collateral and might come up short. Taken together, the supervisory and ELA review could show the Greek banks to be insolvent, and Greece wouldn’t have the means to use euros to prop them up again.
At some point, a default could force a decision on Greece’s euro access. For example, if the government defaults to the ECB [again, and we really mean it this time] on July 20, that could trigger margin calls on the banking system and lead to a more generalized default....
The euro area could decide to help Greece to an “orderly exit,” through a phased withdrawal of liquidity [i.e., cut off the subsidies more gradually, like over a period of several lifetimes] or some other settlement mechanism. It could also put Greece’s euro membership on temporary suspension, a prospect raised over the weekend by German Finance Minister Wolfgang Schaeuble.
[Central Bankers could] convert the emergency aid into a swap line, a tool that central banks use to extend liquidity to their counterparts.
Already, the ECB is preparing a facility with its Bulgarian counterpart, as a way to offer euros to the Bulgarian banking system against eligible collateral. Neither central bank would comment on the project.
Meanwhile, Greece issues dire warnings about the humanitarian crisis that Europe is causing.  "Give me what I want or I'll keep hurting myself."

*Update:  The Fiscal Times estimated that the Greek banks have about 1 billion euros left, which is 90 Euros per Greek.

1 comment:

Anonymous said...

This sounds remarkably like the housing bubbles in the United States, one of which devastated Houston in the 80s, and the entire country in 2007. These systemic bear traps are dangerous.