Grexit? More like Grout

Greece is on its way out of the euro – messily, haphazardly, and largely irrespective of what happens in the election. In expectation of a currency collapse, taxpayers are delaying payments, damaging government revenues. Withdrawals from Greek banks totalled over €2bn in early May, and by all accounts are now gathering pace. This is a slow-motion run on the banks – a “bank jog” – that heralds their collapse. Payments from the Troika have been – apparently temporarily – halted, while the European Central Bank has now refused to accept collateral offered by the Bank of Greece for additional loans.

As a result, and with increasing withdrawals by panicked depositors, the ECB has had to put the whole banking system on a life-support, agreeing €100bn of Emergency Liquidity Assistance (ELA). Without this cash injection, the system would already have folded.

But this desperate situation can’t hold. The ELA loans are guaranteed not by the ECB, but by the Greek state. They become, in other words, yet another burden for a state already creaking under the weight of unpayable liabilities; and guarantees by the Hellenic Republic are unlikely to calm anyone’s nerves – least of all those fearing their savings are about to evaporate. The ELA can only ever be a drip.

A comprehensive rescue of the banks would require their recapitalisation – pumping funds directly into bank reserves. The ECB, however, is reluctant to do this. No doubt it fears adding still further to the teetering pile of liabilities it has amassed in southern Europe, and it has no mandate to act. The Greek state, meanwhile compelled to operate in euros, simply does not have the capacity to act. Former Prime Minister Lucas Papademos estimates it willrun out of cash by the end of June without further bailouts.

An insolvent banking system cannot last; or, more precisely, one that everyone believes to be insolvent cannot last. A bank always depends on an act of faith by its depositors, or else it cannot both take short-term deposits and make long-term loans. If the faith evaporates, the bank goes with it, as desperate savers descend on branches to withdraw their cash.

At some point, perhaps provoked by the election, perhaps pushed by events elsewhere in Europe, the banking system will crumble and Greece’s operational exit from the euro will become accepted fact. New currency will need to be issued, and used for bank recapitalisation. Until then, Greece limps on: with ordinary Greeks as the victims of a Eurozone crisis they did not cause and austerity measures they do not deserve – whatever Christine Lagarde may think.

If a new government is formed after June 17, it is to be hoped it can take decisive steps to break the vicious spiral downwards the country is now locked into: issue a new currency; use it to recapitalise the banks, taking them under state control; impose tight currency and capital controls; and finally work on making Greece’s rich pay their share of taxes. For the rest of us, strict controls on the movement of capital should help restrain markets in full-throttle panic.

It’s not yet all over bar the shouting. But the chance of avoiding Grexit has been and gone. Time to prepare for Grout.


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