Tuesday, February 17, 2015

Neil Wilson — Greece and the Art of Liquidity

The war of words with Greece is hotting up. The spin is so great I'm surprised nobody has been sick yet. It's like a fairground waltzer gone mad. 
There have been at least six arbitrary deadlines that have come and gone all of which individually signalled 'The End' for Greece and all of which had no effect whatsoever. 
Unsurprisingly. 
Because it is all political rhetoric attempting to frighten the Greek people who, as usual for a people under threat, have doubled down and backed their electedgovernment against the bunch of unelected bureaucrats who have got rather too big for their boots. 
Let's look at the reality of the situation. The Eurozone is, at its root, a three layered hierarchy of liability pegs that make the liabilities of all the members the same effective value - which we call the Euro.…
3spoken
Greece and the Art of Liquidity
Neil Wilson

Also

Bond Economics
Capital Controls And Greek Euros
Brian Romanchuk

5 comments:

Jose Guilherme said...

The only actual sanction the ECB then has is to turn off TARGET2 clearance access and effectively remove the peg between German Euros (let's be honest about who is in charge here) and Greek Euros. At which point Greek Euros start to float.

And all that means is that for a Greek to pay a Spaniard they would have to exchange Greek Euros for German Euros via a third party transaction. Since the transactions are currently well matched, that's a nice little profit opportunity for some enterprising financial organisation. (Neil Wilson)


Not so fast. Once cut off from TARGET2, Greek (euro) bank deposits won´t be transferable abroad. And for the new Greek "euro" to be accepted in international transactions it would have to be quoted in some Foreign Exchange market (perhaps London?) and that might take time. It would be better, in that case, for Greece to simply issue a new currency.

But - as Neil Wilson correctly points out - it´s unlikely that the ECB will dare to expel Greece from the eurozone by cutting off the Bank of Greece from TARGET2. That would be an illegal and unconstitutional measure - the unelected and risk-averse ECB governors would think twice or thrice before taking that step.

This being so, the Greek government should simply ignore the ECB´s threats. It can get direct loans from the country’s commercial banks and then use the newly created euro deposits to either pay bills internally or pay debt held abroad. It won´t have to "run out of money", even if it stays in the eurozone.

If Greece keeps its nerve it may well prevail in this battle. And it’s a good sign to observe prominent U.S. liberals like Krugman coming out in support of Greece’s refusal to raise its primary surplus target.

NeilW said...

"And for the new Greek "euro" to be accepted in international transactions it would have to be quoted in some Foreign Exchange market "

Perhaps you're not old enough to recall what 'correspondence banking' is.

Plues see here:

There is always a way if there is money to be made doing so.

Brian Romanchuk said...

The advantage of cutting off TARGET2 is that the government is not redenominating anything, and so it might be able to stay within the EU. (I am not a legal expert, but it seems that shutting off one segment of the financial system would note invalidate other laws.)

Getting quotes for Greek euros would take the same amount of time as a new currency. Moreover, there is a nominal anchor for a "Greek euro" - people could buy them on the view that the Greeks will fully reenter the euro once the official creditors are crammed down. There is no nominal anchor for a completely new currency.

Jose Guilherme said...

The "Greek euros", being untransferable and inconvertible into "real" euros, would be worth a fraction of the true euro.

And there´s no way Apple or BMW would accept such euros in exchange for their products. They´d ask for dollars or swiss francs - and Greece does not have them to pay for her imports.

As such, in (the unlikely) case of expulsion from TARGET2, Greece would rather issue a new currency and have it quickly traded on foreign exchange markets.

But we should assume that, for the moment, Greece will not be cut off from the eurozone and that the ECB´s threats (yanking of ELA and, implicitly, expulsion from TARGET2) are just that - threats, unlikely to be followed by action.

Let then Greece take advantage from the fact that its banking system issues euros - by taking loans from the banks and subsequently use the proceeds to pay the foreign debt denominated in euros.

Once that debt is paid, Greece will be in a much better position to negotiate an orderly exit from the eurozone - since it will then be free from a crushing debt burden denominated in a foreign currency destined to appreciate vis a vis a new drachma.

NeilW said...

"And there´s no way Apple or BMW would accept such euros in exchange for their products."

Then they don't get to sell Apple and BMWs in Greece, and Samsung and Mercedes will get the deal instead, or somebody else - perhaps outside the EU. China or Russia for example.

Will you please stop seeing the Rest of the World as though it is one single entity that works in unison. It patently does not do that.

Mental models with the RoW as a single entity are half the problem. They cause incorrect beliefs to arise.