Monday, 21 May 2012

Grexit mechanics

As to exactly how Greece can be forced from the Euro without a newly elected Greek government having a say in the matter, the decision could well rest with the group of men pictured below - the Governing Council of the European Central Bank.

It all depends now on Greek depositors. If the run on the Greek banks continues, the decision will land in the lap of the ECB, as Greek blogger Inside Greece explains;
To make up for the loss of deposits over the last two years, the ECB has allowed Greek banks, shut out from intermarket borrowing and lacking collateral that the central bank would accept, to be financed through emergency liquidity assistance (ELA). This means that the banks are able to borrow from the Bank of Greece, rather than the ECB, by putting up collateral that is theoretically more risky than bonds, such as small business loans or mortgages. It is thought that Greek banks have borrowed about 60 billion euros this way. But the supply of money is finite. Parliament has set the limit for the ELA scheme at 90 billion euros and Greek banks do not have limitless collateral.

Furthermore, there is the possibility that the ELA tap could be turned off if central bankers in Frankfurt become concerned about Greek banks becoming insolvent. In order to access ELA, currently the banks’ only source of funding, albeit a dwindling on, the ECB board needs to give its approval. But ELA funding could be halted with a two-thirds majority decision. This would cut off Greek banks from liquidity and Greece would be forced to begin printing its own money. Since it can’t print euros, the only option would be to return to the drachma.


Jeff Wood said...

Yes, the difficulty everyone has is forecasting the exact trigger point for Greek exit. Perhaps this would be it.

Anonymous said...

Anonymous said...

Is it not also so, that there is no mechanism, without agreeing a new treaty, for a Eurozone member to stop being one…?

If so, that would logically mean that "poor" Greece would have to leave the European Union… :-(

Edward Spalton said...

Do not rule out the possibility of a pro-EU coup within Greece to "restore order".

The ECB came (somewhat reluctantly in my opinion) to the conclusion that there was no legal means of expelling a delinquent state.

The Papandreou government purged the Greek General Staff a while ago. If I were the EU's man in Athens I would have suitcases of euros for the generals and police commanders together with the tame politicians of the "main" parties.

Whilst EU states are treaty-bound to show "solidarity" with each other, any "fraternal assistance" on the Warsaw Pact model would be disguised as far as possible by "arm's length" support of collaborationist internal forces.

It must eventually come to a matter of coercion. The EU has only succeeded so well by acting almost entirely through the native institutions and political parties of member states.

In a way, it would be a relief to have a foreign occupier - Eurocorps or the paramilitary European Gendarmerie to shoot at without compunction. SO they will do all they can to avoid that.

G. Tingey said...

Ed Spalton
You really ARE paranoid, aren't you?

A coup or semi-couip would be too much of a give-away. Everyone really would notice, and the resultant civil breakdowm, across many states would be a disaster, for everyone.
So no to that.
Suitcase of Euros, LOTS of suitcases of Euros - now that is a much more likely scenario - after all, Philip of Macedon (Alexander's father) invented that idea, didn't he?