stuck with euro-denominated Target claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.
A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totalled 43 bln euros at the end of April – would flow into the rest of the Eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for union’s remaining members.
All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.
The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of 81 bln euros in emergency liquidity by now, which exceeds the Greek central bank’s 41 bln euros in recoverable assets. With Greece’s banks guaranteed the
the monetary needed funds, the government has been spared from having to introduce capital controls.
Rumour has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralised is wearing thin, given that, in many cases, the collateral has a rating below BBB–, thus falling short of investment grade.
If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.
the ECB, the Greek government would be able to secure a far more favourable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. And if Greece exits, a large share of the acquired resources measured by the Target balances and the cash that has been printed would turn into an endowment gift for an independent future.
Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.