Great Game

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

In other





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.

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