The biggest threat to
an orderly resolution of Greece's new debt crisis is that the European Central
Bank ceases to fund Greece's banks.
So at the moment that
Greece was deemed not to be in compliance, it is difficult to see how the ECB
could continue to provide emergency liquidity assistance to Greek banks. They
would then be in dire straits.
Without the ability to
replace lost deposits with cash from the ECB, obtained via so called repurchase
agreements or repos, Greek banks would run out of cash - because the
uncertainty over Greece's financial future is causing depositors to withdraw
billions of euros every week.
Here is where it gets
a bit technical, surreal and scary (if you're not scared already). When Greek
banks borrow from the ECB, they hand over part of their holding of Greek
government debt as security or collateral. Without this collateral they could
not get the money.
But this debt has a
junk credit rating, so under ECB rules it should not qualify as collateral for
emergency loans. The thing is that Greece and its banks have a waiver from the
prohibition on using junk as collateral, because Greece is deemed to be in
compliance with the terms of its 172bn euro eurozone/IMF bailout.
So if there were ever
a formal decision that Greece is in breach of bailout conditions, at that point
Greek banks would no longer have access to money from the ECB. And at that
point, pretty much everything would fall apart in a financial sense for Greece.
Those still with euros
in Greek banks would presumably demand their money back - and if there were
such a run, the banks would face collapse. And the moment that Greek banks were
unable to swap Greek government debt for euros from the ECB, the Greek
government itself would lose its last source of credit.
In those
circumstances, it is hard to see how the Greek government could avoid default
on its debts not only to lenders but to those from whom it buys services.
At that juncture, the
Greek government would have little option but to abandon the euro for a new
currency, nationalize its banks, and impose sweeping controls on the export of
capital.
It would be out of the
eurozone - at who knows what cost both to it, and to the rest of Europe. Or to
put it another way, the ECB has the power of life and death over Greece. And
given that the ECB is one of the troika that monitors whether Greece is in
compliance with the bailout, this is a responsibility that it can't delegate to
other technocrats.
Presumably the Greek
government and the troika have the ability to fudge for a period whether
decisions by Mr Tsipras and his team to abandon the privatization programme
represent a formal bailout breach.
But on February 28,
Greece's bailout formally ends, unless a rollover is agreed. That is judgment
day for Greece, with the ECB as hanging judge or rehabilitation judge. As a
supposedly apolitical central bank, the ECB and its president Mario Draghi will
not be relishing their power to determine whether Greece stays or leaves the
euro.
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