Writing in the Daily Telegraph, Jeremy Warner on the maneuverings of Yanis Varoufakis, Greece’s new finance minister:
[R]ight now, it is impossible to know what [Varoufakis] and his fellow Syriza leaders are trying to achieve. First they promise to repudiate Greece’s debts, then they say they will honour them. They pledge to reverse austerity, and now they plan to go “cold turkey”, which presumably means reducing the Greek financial diet from one of thinnest gruel to nothing at all. They say they won’t have any dealings with the hated Troika, comprising the EU, International Monetary Fund (IMF) and European Central Bank (ECB), but instead intend to negotiate bilaterally with the individual nations which have lent Greece money in a series of bailouts. Good luck with that one. There is more chance of the IMF and the ECB cancelling their debts – and there is virtually no chance of that – than individual nations, who would then have to explain to their own taxpayers why at a time of austerity they have lent so much money to Greece only then to cancel the obligation.
Mr Varoufakis is said to be an expert on game theory. I guess it is in the nature of playing a good game that you must keep your opponents guessing to the last. Mr Varoufakis has no option but to play hardball. Brinkmanship was always going to be the substantive part of his negotiating strategy. But what’s going on at the moment is just chaotic nonsense. It’s impossible to know what Mr Varoufakis wants. Far from making progress, what Syriza is actually doing right now is leading Greece over the cliff. How does the Greek government propose to pay its bills once the money runs out? If the ECB doesn’t do it first, the Bundesbank will surely move shortly to block the Target 2 transfers currently necessary to fund capital flight from the Greek banking system.
The issue with the European Central Bank is that it provides emergency funding (so-called ELA) to Greece’s struggling banks. Its ability to do so is about to expire.
On Saturday, the ECB’s Erkki Liikanen spelled it out:
“Greece’s program extension will expire in the end of February so some kind of solution must be found, otherwise we [the ECB] can’t continue lending,” Liikanen, also the governor of Finland’s central bank, told public broadcaster YLE.
My guess is that an excuse will be found to string things along beyond the end of the month. Blocking Target 2 transfers would not precede the close-down of the ECB’s lending, but if it followed it, Greece would have crossed not the Rubicon, but the Styx.
Target 2?
Back in 2012, I linked to a good explanation by Ekathimerini’s Nick Malkoutzis. Here’s an extract:
ELA, though, is not totally risk-free for the eurozone due to the way that deposits are transferred through a central payment system, known as Target2.
“When a depositor in a peripheral economy moves their funds to a bank in another eurozone country, the payment is processed through the eurozone’s settlement system, creating a claim between the national central bank of the peripheral lender and the rest of the Eurosystem,” explains Neil Unmack of Reuters. “If it started to look like a country was seriously at risk of leaving the eurozone, depositors might move funds en masse to stronger countries, like Germany, with the banks in weaker countries funding the deposit run through ELA.”
In this situation, the claims between peripheral central banks and those in core eurozone countries would build up to potentially worrying levels…
Those balances have receded quite a bit. In a commentary from June last year, Money and Banking noted that
At their 2012 peak, deficit countries owed surplus countries in excess of €1 trillion. The primary deficit countries – Greece, Italy and Spain – were in debt to Finland, Germany, Luxembourg, and the Netherlands. [By April, 2014] the Target2 balances have declined to less than €650 billion.
But still…
More on Target 2 here and here.
Warner concludes:
The reality is that Syriza is not just playing a dangerous game, it is playing no game at all likely to produce anything other than abject disaster. I had high hopes of Mr Varoufakis, but am fast losing my faith. Capital controls and limits on cash withdrawals from Greek banks can be only weeks, if not days away.
Days? Weeks? Never? I don’t know. What I do know is that I was not surprised that outflows accelerated to record levels in the run-up to the elections.
Withdrawals from Greek banks exceeded 14 billion euros ($15.9 billion) in the run-up to the snap elections that catapulted the anti-bailout Syriza party to power, including 11 billion euros that were taken out in January, the person said. Between Jan. 19 and Jan. 23 outflows were greater than in May 2012, when Greece was on the brink of exiting the euro area.
And what’s happened since?
Keep watching the banks.