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i didn't intend to copy the entire article, along with/in addition to
the excerpts i chose, in my original message. Below is what i
intended to send. Check out this 'news report' {!] currently at The
Times of Change, Greece <thetoc.gr>
ECB signals it could loosen bank funding if Greeks vote 'Yes'
ECB Vice President Vitor Constancio signalled that the ECB could
loosen funding to Greek banks if Greeks vote 'Yes' in Sunday's
referendum
<http://www.thetoc.gr/eng/economy/article/ecb-signals-it-could-loosen-bank-funding-if-greeks-vote-yes>
On Fri, Jul 3, 2015 at 9:31 PM, Dayne Goodwin <[email protected]> wrote:
> Greece is solvent but illiquid: Policy implications
> by Paul De Grauwe
> VOX, July 3
> <http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications>
> Centre for Economic Policy Research <www.cepr.org>
>
> [ 10 minute audio interview with Paul De Grauwe
> <http://media.bloomberg.com/bb/avfile/News/Surveillance/vCthvJn_uyC4.mp3>
> Professor of international economics, London School of Economics, and
> former member of the Belgian parliament ]
>
> *Greece’s debt is 180% of GDP, which seems to make it insolvent
> without large primary surpluses. This column argues that since
> restructuring lowered the interest burden to just 2% of GDP, Greece is
> solvent – or would be with nominal GDP growth of just 2%. The ECB’s
> misdiagnosis has caused an unnecessary banking crisis. The solution is
> to accept that Greek debt is sustainable, so the austerity programme
> can be relaxed and liquidity support provided to the Greek banking
> sector.*
>
> . . .
> From the preceding it follows that the effective debt burden of the
> Greek government is lower than the debt burden faced by not only the
> other periphery countries of the Eurozone but also by countries like
> Belgium and France.
>
> This leads to the conclusion that the Greek government debt is most
> probably sustainable provided Greece can start growing again.
>
> Put differently, provided Greece can grow, its government is solvent.
> . . .
> Austerity is certainly not the way to do it. Greece has been the
> champion of austerity with a cumulative increase of the discretionary
> primary surplus of 18% of GDP since 2009 (based on Eurostat). This has
> been instrumental in producing a cumulative decline of GDP of 25%.
> . . .
> The ECB follows the Bagehot-principle, which states that the central
> bank may lend money only to those institutions that are solvent but
> illiquid. The ECB assumes that the Greek government with a headline
> government debt of 180% of GDP is not solvent. Therefore it is not
> willing to involve the Greek government bonds into its OMT- and
> QE-programmes. [Outright Monetary Transactions and Quantitative
> Easing]
>
> In contrast, the ECB is ready to buy government bonds of other
> countries in the Eurozone, which have a higher effective debt burden
> than Greece, both in the context of its OMT- and QE-programmes. The
> refusal by the ECB to treat Greece the same way as the other
> member-countries of the Eurozone is erroneous and is based on a
> misdiagnosis of the nature of the Greek debt.
>
> The misdiagnosis by the ECB matters: An unnecessary banking crisis
>
> This misdiagnosis by the ECB now has dramatic effects on the Greek
> banking system, and thus on the Greek economy as a whole. The ECB
> takes the view that the Greek banks which hold Greek sovereign debt
> are now becoming insolvent themselves, and therefore cannot profit
> from lender of last resort activities.
>
> Since the (restructured) Greek government debt is most likely
> sustainable, the Greek banks should be allowed to use their Greek
> government bonds as collateral to obtain additional liquidity support.
>
> By refusing this, the ECB has caused an unnecessary banking crisis.
>
> This crisis will deepen the recession, increase unemployment and
> dramatically deteriorate the Greek government budget, transforming a
> liquidity crisis into a renewed solvency crisis. In doing so the ECB
> helps keeping Greece in a bad equilibrium. This may force Greece out
> of the Eurozone. The ECB would bear a huge responsibility for this
> outcome.
>
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