Following the unsuccessful negotiations last week between the undemocratic forces of finance (Troika-led Eurogroup) and the will of a democratically elected government, the issue came to a head. The Greek government decided to “leave” the Troika’s “take-it-or-leave-it” offer presented to them on the 25th June. The Greeks have had an offer and they rejected it, something this blog has proposed all along, which will probably lead them to default tomorrow on their Euro 1.6bn IMF loan repayment.
However, there is no talk of Grexit which would not be in the interest of the Greeks. Or in fact in the interest of Greeces’ creditors, to whom it owes 320bn, with an additional 120bn funding the Greek banks, via the ECB (Target2). So, understandably, Grexit is off the table.
Instead we are getting a Greferendum on the 5th July, and, at least until the Greeks have decided, Grapital controls. They follow the ECB’s decision to put a stop on the limit of 89bn that Greek banks can re-finance themselves through the Emergency Liquidity Assistance facility, ELA.
The referendum will ask Greeks to vote ” yes” or “no” on the Troika agreement. That, surely is the only way such an agreement can ever be implemented in Greece, were the Greeks to vote for it. As the Finance Minister Varoufakis pointed out, a democratic decision which would include all citizens. The government’s recommendation is to vote “no”, against the despotic Troika agreement.
So, a spot of bother, indeed, for all concerned, to put it mildly. Witness the furious back-pedalling which has already gone on by the Troika representatives, and watch that grow into a further frenzy as the referendum date approaches.
But let us stand back and have a calm look at the measures introduce.What are the likely effects of these developments, will they help or hinder the Greek government and their battered economy?
Effects of Capital Controls
Until the 7th July Greeks banks will remain closed, no money can be transferred out of the country, the maximum amount of withdrawals from accounts through ATMs is Euro 60 per day. Unless of course you have foreign account, in which case there are no limits on cash withdrawals though. So tourists will not be affected, their holidays are safe.
So will the banks run out of money because of the cap of ELA?
Effect on banks next week
The ECB put a cap on the 89bn Euro ELA which it allowed the Central Bank of Greece to fund itself and therefore its banks through the Euro payment system. The stop of transfers outside the borders of Greece means that the 89bn limit does not need to be extended. Greece will receive money from abroad, but cannot pay any money out, which will reduce the need for ELA.
Effect medium term
However, ultimately money will need to flow abroad for Greece to pay for its vital imports such as food and petrol. It is likely that, were controls to extend in the future, that the Finance Ministry would need to approve payments abroad for appropriate trade transactions. An arrangement like that existed in Cyprus, when it introduced (the now lifted) capital controls two years ago.
Against this, in the next 3 months Greece runs a monthly current account surplus of between 1.5bn to 2 bn a month, as tourists from Europe flock to Greece. This money alone will reduce the 87bn Euro cap, all other things being equal, by approximately 5bn.
Can Greece run out of Euro Notes?
Greek banks cannot run out of notes, as long as the Greek Central Bank will supply notes to the Commercial Banks. It will do so, as long as Greek Banks provide, or pledge, assets to the Central Bank of Greece in return. In effect, commercial banks in Greece buy notes from the issuer, the Central Bank of Greece, to pay them to their customers, if these customers want to withdraw their funds. As long as the banks “remain solvent”, the Greek Central Bank will provice Euro notes to the Greek banks. (The ECB or the ELA limit will not affect the note issuing facility of the Greek Central Bank in any way)
It seems certain that a withdrawal limit of £60 Euro a day will decrease demand for Euro notes significantly, while still providing each account holder with the theoretical possibility (were capital controls to be extended) to withdraw Euro 1,800 of cash a month.
So, the ELA Cap and the 60 Euro cash limit do not effect the economy in a destabilising way. In fact they stabilise the economy, as uncertainty about capital flight is eliminated. Money cannot leave the country, no large cash sums can be withdrawn. However, beyond the one week horizon, the ability to transfer money abroad for real trade transactions has to be re-instated, albeit under state control, should capital controls stay in place.
So, let us come to the bigger picture, why should Greeks vote against the agreement?
Currently Greek public opinion is divided on whether to accept or reject the proposal. The Greek government therefore has to provide a persuasive narrative to its people to follow its recommendation. In short, it has to tell its people why it should vote “no”, and, more importantly, why they would be better off if they did.
The Greek government is rightly against further austerity measures, as are all economist looking at the issue. Instead of further committing to austerity, Greece might now want to tackle unemployment. And now, freed from the shackles of the Troika, it could in effect do something about it. The Greek government could boost aggregate demand, rather than letting it fall further under the Troica doctrine, and therefore provide a Keynesian solution to the unemployment problem.
The Public Works Job Guarantee
The Greek government could propose that it would become the “employer of last resort” of the 25% of the Greek workforce currently unemployed and offer them a limited job guarantee, working in public works projects. Perhaps 30 hours a week for a 400 Euro a month to take 1 million from the 1.3 million unemployment register.
This would need to be financed, and after having fallen out with its international creditors, Greece will need to look for funding for such a scheme at a cost of Euro 5 bn anually.
So where is the money going to come from?
1. Greek Commercial Banks
It could ask the Greek commercial banks to lend the government 5bn Euro. Why would Greek banks provide the funds? Well, for the banks lending to the government is still as safe as it gets. Ultimately, if the Greek government fails, and the Euro fails, all the Greek banks will fail. So the banks, if they want to survive, should lent to the entity which is most likely to ensure its survival.
These new funds to the government could, in theory, be restricted by the ECB ELA limit. But capital controls mean that the ELA ceiling will fall over time, so there should be plenty of capacity for Greek banks to lend to the government.
2. Greek Citizens
It could ask the Greeks, in particular the ones who until now have transferred all the money abroad, to buy Greek government bonds. As they have no outlet for their internally generated funds now, they might want to invest in Greek government bonds.
3. The G-Euro
It could create a parallel currency, to issue in parallel with the Euro. For example, 7% of the government’s expenditure from now on could be paid in G-Euro notes. That would free 5 bn of government expenditure to be used for the public works project.
Ultimately, funding from the banks or its citizen will prove possible, probably at very low interest rates. However, yet more borrowing, for an already heavily indebted government can surely not be the solution.
So the G-Euro looks preferable. The advantage of the G-Euro, issued as currency, is that no interest at all will be paid. The only cost to Greece will be the cost of printing it.
Money can be issued into the economy for the public good, and should be to further the long term aims of society. This is an idea embraced in the UK by the Positive Money movement. Their ideas provide the basis for this thinking.
Will such a public works project pay for itself, even if the money is borrowed? If one assumes that the 5 bn Euro will lead, through the fiscal multiplier of 2 to, perhaps, 10bn of economic growth it will be self financing. The funds spent by the Greeks on their new job-guarantee will help the economy to recover. A total of 10bn additional economic growth will represent over 5% of Greece’s battered GDP of 180bn. Compare and contrast that to the Troika’s proposed reduction of GDP through tax increases, pension cuts, and loan reduction payments, which would have amounted to perhaps 3-6% reduction in GDP.
Now, all of the above might, at this stage, seem like pie in the sky thinking. But it provides the first signs of hope for Greece, none which would not have been possible through further negotiations with the Troika. Now we have a period of relative calm, perhaps counter-intuitive, as the markets gyrate this Monday trying to come to terms with developments over the week-end. But, peace and quiet will return and it is essential to bring stability into the country, and the rupture with the Troika, the referendum, and the capital controls will prove to be the right choice for Greece.
How could these funding schemes work in detail? And is the G-Euro the best solution? I will explore the details in another post.