Ifo View­point: Varo­ufakis’s

Financial Mirror (Cyprus) - - FRONT PAGE -

Game the­o­rists know that a Plan A is never enough. One must also de­velop and put for­ward a cred­i­ble Plan B – the im­plied threat that drives for­ward ne­go­ti­a­tions on Plan A. Greece’s fi­nance min­is­ter, Ya­nis Varo­ufakis, knows this very well. As the Greek gov­ern­ment’s anointed “heavy”, he is work­ing Plan B (a po­ten­tial exit from the Eu­ro­zone), while Prime Min­is­ter Alexis Tsipras makes him­self avail­able for Plan A (an ex­ten­sion on Greece’s loan agree­ment, and a rene­go­ti­a­tion of the terms of its bailout). In a sense, they are play­ing the clas­sic game of “good cop/bad cop” – and, so far, to great ef­fect.

Plan B com­prises two key el­e­ments. First, there is sim­ple provo­ca­tion, aimed at ril­ing up Greek cit­i­zens and thus es­ca­lat­ing ten­sions be­tween the coun­try and its cred­i­tors. Greece’s cit­i­zens must be­lieve that they are es­cap­ing grave injustice if they are to con­tinue to trust their gov­ern­ment dur­ing the dif­fi­cult pe­riod that would fol­low an exit from the Eu­ro­zone.

Sec­ond, the Greek gov­ern­ment is driv­ing up the costs of Plan B for the other side, by al­low­ing cap­i­tal flight by its cit­i­zens. If it so chose, the gov­ern­ment could con­tain this trend with a more con­cil­ia­tory ap­proach, or stop it out­right with the in­tro­duc­tion of cap­i­tal con­trols. But do­ing so would weaken its ne­go­ti­at­ing po­si­tion, and that is not an op­tion.

Cap­i­tal flight does not mean that cap­i­tal is mov­ing abroad in net terms, but rather that pri­vate cap­i­tal is be­ing turned into public cap­i­tal. Ba­si­cally, Greek cit­i­zens take out loans from lo­cal banks, funded largely by the Greek cen­tral bank, which ac­quires funds through the Euro­pean Cen­tral Bank’s emer­gency liq­uid­ity as­sis­tance (ELA) scheme. They then trans­fer the money to other coun­tries to pur­chase for­eign as­sets (or re­deem their debts), drain­ing liq­uid­ity from their coun­try’s banks.

Other Eu­ro­zone cen­tral banks are thus forced to cre­ate new money to ful­fil the pay­ment or­ders for the Greek cit­i­zens, ef­fec­tively giv­ing the Greek cen­tral bank an over­draft credit, as mea­sured by the so­called Tar­get li­a­bil­i­ties. In Jan­uary and Fe­bru­ary, Greece’s Tar­get debts in­creased by al­most one bil­lion eu­ros per day, ow­ing to cap­i­tal flight by Greek cit­i­zens and for­eign in­vestors.

At the end of April, those debts amounted to 99 bln eu­ros.

A Greek exit would not dam­age the ac­counts that its cit­i­zens have set up in other Eu­ro­zone coun­tries – let alone cause Greeks to lose the as­sets they have pur­chased with those ac­counts. But it would leave those coun­tries’ cen­tral banks

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