The money pump (sentences to ponder)

Let’s say the run on Greek banks continues or accelerates.  Then this sentence will become more relevant:

Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly.

In other words, the ECB has to pull the plug at some point or simply finance Greece ad infinitum.  Read the whole thing, ignore the hyperbole toward the end, and study up on brinksmanship.

Here is a useful discussion of ELA [Emergency Liquidity Assistance], excerpt:

ELA is a subject on which the ECB is deeply reluctant to provide information – even on where or when it is provided.

“You don’t say when you are in an emergency situation, because then you make the situation worse. So I really don’t see the usefulness of being more transparent,” Luc Coene, Belgium’s central bank governor, explained in a Financial Times interview this month.

And here is yet further detail, excerpt:

Some of Europe’s central bankers are nevertheless no longer willing to allow themselves to be endlessly tapped for cash. Belgian Luc Coene has already openly warned that even the ELA payments must “absolutely” be stopped if the Greek banks are actually hopelessly bankrupt, and not merely illiquid.

If you read through these sources, it will help answer the question — which I receive frequently — “why can’t Greece default and yet not leave the eurozone?”


The solution is for Greece to default and print Euros using its Euo printing press, since Europe doesn't really have armies to speak of.

I laughed, and then I realized that they might be doing this already. If they were careful, they could get away with it until they ran out of paper. Still, it would be way too little to make a dent.

actually, it is a coin. They can mint a trillion euro coin and deposit it at the ECB.

I'm not sure why there would be an issue with buying more paper, since they are printing Euros to start with.

And why would it be too little to make a dent?

It certainly would be a good interim option for Greece. Given the disarray and ponderousness of the EU, the Greeks could simply print their own euros and get away with it for months. Eventually the EU would have to close down this option or kiss the euro good-bye.

What do you mean by "Greece default"?

The Greece government not paying what is due?

Every entity that is in anyway Greek not paying what it is due in Euros or dollars and instead paying in drachma as dictated by the Greek government?

Ie., you have a supply contract with a Greek firm payable in the sum of one million Euros, but on the day of delivery, the Greek government dictates the payment is one million drachma, printed on toilet paper.

If Greeks see all their bank deposits, pay, goods sold converted from Euros to drachma, but their debts remain in Euros, they will have no choice but default. Greek banks have provided assets (loans) in Euros to the ECB as security for draws on the central bank, so that Greek debt will remain in Euros unless Greece government dictates the ECB accept drachma as payment for securities traded for Euros.

All the talk about Greece being forced out of the Euro merely converts a Greek government default plus some portion of Greek debt in default to a 100% default on all Greek securities and contracts, either immediately, or as a consequence of no Greek entity being able to convert drachma into Euros sufficient to meet the terms.

How can converting a Greek government default into a total Greek default helps the EU is unclear.

This helps you see how a Greek default helps the EU.

Don't you think Greece could be doing the limb amputation itself, maybe cutting off some state enterprises? File under video with many uses.

Greece probably could do such an amputation, but after the most recent elections, it seems unlikely to do so.

totally agree with 'mulp'....greece should stay within the euro (and insolvent greek entities, including govt, should default)

Yes, but in that event the ECB loans would stop and Greece would be forced to live within their budget. This whole situation is caused because Greeks, collectively, have decided to spend more Euros than they collect in taxes. It would be shocking if they suddenly decided to balance their budget immediately, which is what defaulting and staying in the Euro would entail.

Here’s the rule:
“FT: So it would have to be cut off automatically?
LC: Absolutely. That is one of the principles of the whole ELA policy. It is emergency liquidity assistance – not solvency assistance.”

But… because of international pressure to put bail outs before rule-making, Germany and its prudent allies have not been able to press on with the rule-making-first, and so there’s still room for discretion and uncertainty. In the end it remains a political decision.
“If Greece’s banks became insolvent as a result of international financial support being withdrawn, the ECB would have no choice but to cut off emergency liquidity, Mr Coene warned. The decision on whether Greece stayed in the eurozone was for politicians, however. “It will be a political issue – where is the balance of solidarity – rather than a technical issue about whether the banks have been sufficiently recapitalised or not.””

The latest story is that the OECD is once again officially on side with the euro-bond bail out mob.

Every lifeguard training class warns against being pulled down with the drowning people. It reminds me of one of those old Hogarth prints of scenes of madness. Hasn’t the rational world moved on since:


What does it mean 'leave the eurozone'? Everybody in greece can default yet the greeks still can use euros; can they 'leave eurozone' and continue using euros?

'can they ‘leave eurozone’ and continue using euros'


If there is too much default, the Greek banks lose their external support, in a nutshell. Or if somehow that support continues, it simply becomes free money for the Greeks, which cannot last forever.

Haven't they already defaulted? It is just their creditors don't care.

Their non-state creditors do care. The state creditors don't care, because political concerns always override other concerns.

But under a scenario we discussed previously, the Greek Central Bank becomes the lender of last resort by printing Euros and otherwise re-financing the banking system. Using this "free money", the GCB could even finance the Greek government and allow the Greeks to default yet continue using the euro. Of course this can't last forever, and eventually the "Greek euro" will be outlawed by the rest of the Eurozone, but the Greek euro can be the currency of Greece. This allows the Greeks to control their (devalued) currency yet continue to use the "Greek euro" instead of the drachma. All euro-denominated debts would be declared repayable with Greek euros. After a decent interval the Greek euro can be renamed "drachma", and Greece becomes simply another EU member outside the Eurozone.

I think this scenario has a 30%+ likelihood if SYRIZA wins the June election. Some of the other weak members of the Eurozone might follow suit if it doesn't work out too badly for Greece. (Sounds crazy at first, but this crisis is really more about politics than about soberly confronting a grim reality.)

The free money may not last forever, but it won't be the Greeks who turn off the spigot. To say that default would necessarily mean that Greece will "leave the eurozone", implies that the Greeks will be the active party in that process, announcing their transition to a New Drachma economy or the like. This strikes me as wishful thinking.

The Eurozone will have to expel Greece, if it comes to that. The legal framework for doing that is shaky, and the Greeks will fight that process every way they can. If maintaining a death grip on the Euro means that Greece drags the rest of Europe down with it, what's the down side for Greece?

Yes, I think the Greeks are going to fight the EU process the whole way, thus forcing the EU to be tough. The EU countries are far from united, so it might be hard for the EU to actually enforce its own process against a belligerent Greece. And the EU is only part of the Troika that is supposed to manage this mess. I'm not big on Game Theory, but this situation looks like a dream project for a game-theory economist.

"“You don’t say when you are in an emergency situation, because then you make the situation worse. So I really don’t see the usefulness of being more transparent,” Luc Coene, Belgium’s central bank governor, explained in a Financial Times interview this month."

Can someone who is smarter than me explain this? If a company were to claim to be in great financial shape when it really isnt, or at least not admit to being in serious trouble when it actually is, then it would be guilty of fraud, right? But banks are not just allowed to do just that, but encouraged to do so? Am i misunderstanding what is going on here?

We are learning how ignorant the authorities are. This situation has been going on for, what, 3 years? Their high level actions in response to emergencies, their every 3-6 week 'the world is going to end, someone print money' sessions have been going on for that long. Their ineptitude has led to a situation where people are acting in their own rational self interest; get my money out before those fools destroy everything. His response is to play for more room and more time. Keep people stupid and in the dark.

Sorry buddy, you had your shot and you blew it. You will be lucky to get out with your neck intact. I still don't think these financial authorities have figured out what they have wrought.

Hasn't the Greek government already defaulted?

Partially. In february (iirc) a deal was made that forwarded money to Greece to meet their coming obligations. Part of that deal was a writedown of some of their debt.

Looks like holiday makers in Greece may soon be using Drachmas not Euros to buy their chaniotiko Bourekis.

Well. the ECB doesn't have to fund the Greek banks "ad infinitum." Once Greeks pull all their deposits out, the funding could stop, right?

The ECB just needs to take the banks themselves as collateral, then demand payment, and then sell the banks to Germany so all the Greek banks become German banks. Germany could then foreclose on all the assets behind the loans made by the banks.

Or Germany could simply dust off its reunify plan, and "reunify" with Greece.

If you take it as a requirement that Greece's existing banks continue to function, then, yes, exiting the euro is required after a full-stop Greek government default in order that those banks can be recapitalized by a compliant Greek monetary authority. But why is that a requirement? If Greek banks are allowed to fail en masse, (i) normal depositors will be covered by normal deposit insurance guarantees and (ii) non-Greek banks that did not invest in Greek sovergn debt will enter the market to replace them. This is not to say that there would not be great turmoil and suffering under such a scenario, and that an exit might not be a better scenario. But it is to say that if continued euro membersship sufficiently important to the Greek people, it is indeed possible even after a full-stop Greek government default. Furthermore, given the justifiably very low trust of the Greek people in Greek institutions, it's not clear that this isn't their best option, even if one stipulates the great turmoil and suffereing that would result from a failed banking system and internal devaluation.

Under EU rules, all bank deposits must be backed by their government- that's how Iceland got in so much debt. Which it defaulted on, and is being sued by Germany and others on the basis that EU treaties do not allow such defaults (and I know Iceland isn't in the EU, but it is in the economic zone which carries the same treaty obligation.)

Generally there will be an FDIC like facility, but none have had the reserves required, not even the FDIC which was bailed out by its members paying fees three years in advance. Iceland paid out for all Icelanders, but tried to default on foreign deposits in violation of treaty, so the depositor home countries made good, and is now seeking repayment from Iceland.

An article online stated most of the Greeks are doing what Tyler implicitly suggests: voting to renounce the debts but stay in the Euro, because, as a "man in the street" said in the article, 'the EU cannot kick Greece out anyway, and so they have to bail us out'.

Seems the 'man-in-the-street' may be 'smarter' (or long term dumber) than the rest of us--the Greek voters are (ignorantly IMO but defacto) playing brinkmanship and daring the EU to kick Greece out.

If they were pushed off the Euro and cut off from the ECB system but somehow wanted to remain in the Euro, how would the Greeks finance their CA deficit?

Presumably Euro-denominated IOUs of some sort - hmm, does "austerity bond" have the right tone? Could be foisted off on people who probably can't refuse (e.g. part of the salary of Greek civil servants in non-essential positions), or used as collateral for Euro-denominated loans from Greek banks that, at that point, will definitely not be able to refuse. Either way, in a perfect market such IOUs would then trade at a discount to face value, becoming the New Drachma in all but name. Names matter, of course, and the Greek government can impose an imperfect market that is locally biased in its favor.

In the ultimate endgame, as already noted, the Greeks can back up the IOUs with actual Euro banknotes which the Bank of Greece can print to demand. That leads to ugliness all around, which the Greeks would probably prefer to ugliness focused and contained in Greece.

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