Bloomberg reports: “Greece Loses ECB Funds, Raising Pressure to Yield to Austerity”
Greece lost a critical funding artery as the European Central Bank restricted loans to its financial system, raising pressure on the 10-day-old government to yield to German-led austerity demands to stay in the euro zone.
The ECB’s decision, announced at 9:36 p.m. in Frankfurt, will raise financing costs for Greek banks and stiffen oversight by the central bank.
The next move is up to Prime Minister Alexis Tsipras, who swept to power promising to reverse five years of spending cuts that accompanied 240 billion euros ($272 billion) of bailout loans. The ECB move came hours before the Greek finance chief, Yanis Varoufakis, was due to meet Germany’s Wolfgang Schaeuble in Berlin and hours after he met ECB President Mario Draghi.
There was never anything resembling “austerity” in Greece, of course. To please their European (mostly German) creditors, the Greeks made some token cuts to government spending plans, but now the new guy has been swept in promising to end Greek “austerity.”
Now is a very dangerous time for Greek-Euro relations because Greece is now running a primary surplus. As Frank Hollenbeck wrote recently in in Mises Daily: “Historical evidence shows that once a country reaches such a situation it is likely to default within the next two years.” Tim Worstall wrote similar comments in Forbes last August:
If you are running a primary deficit then you don’t have the luxury of being able to simply default on all of your debts. For you’re having to borrow to meet your pensions, social security, defence and so on spending. If you default you’ve still got to find the money from somewhere to keep the old folks and the soldiers paid: so you’ve either got someone to lend to you immediately after you’ve just defaulted or, you’ve got to cut somewhere else in the budget. Given that no one will lend to you immediately, you’ve got to do that cutting. But if you don’t default you can borrow the money and pay the soldiers etc.
With a primary deficit you’re therefore rather a prisoner of those lending you money...
This all changes when you move into a primary surplus. Sure, you’ve still not got enough money to pay all of your bills. But you can pay the ongoing cost of running the government and the country. The part you cannot pay is the interest on all that money you’ve borrowed. At which point a unilateral default begins to look very attractive indeed. We don’t need to borrow more to pay the pensioners and the soldiers. We’re only borrowing more to pay the interest on what we’ve already borrowed. If we just tell all those we’ve borrowed money from that we’re not going to pay then our budget problems are over.
This is simply the latest illustration of what Keynes was referring to when he reportedly quipped: “If you owe the bank thousands, then you have a problem. If you owe the bank millions, then the bank has a problem.” Hollenbeck writes: “In the current situation, it is the EU that has a problem.”
What is the ECB’s end game here? Do they suspect the Greeks are thinking about default, and this is just the latest attempt to scare them back into line? Unfortunately, I have no friends at the ECB who can fill me in.
