Stupid questions about Greece

by philg

A couple of stupid questions about this latest “bailout” of Greece…

  • Why would anyone leave money in a Greek bank at this point? Wouldn’t a resident of Greece be concerned about other residents wiring out their euros and leaving the bank insolvent? Why wouldn’t everyone who lives in Greece keep his or her money in one of the foreign banks that has branch offices in Greece? If that happens, what is the function of a Greek bank?
  • How much actual cash earned by workers elsewhere in Europe will flow into Greece? The bailout is advertised as “$96 billion” but does that mean the creditors will wait to get paid $96 billion that they are supposedly owed (a fictional/theoretical “bailout” since in fact the creditors were not going to get paid) or that people will take hard cash that they’ve recently earned and hand it over to Greeks to spend?

 

5 thoughts on “Stupid questions about Greece”

  1. How did the Fed create hundreds of billions of dollars to bail out Fannie Mae and the rest of Wall Street? They didn’t do it by taxing the average taxpayer. ECB can use the same maneuvers to create money out of thin air for Greece.
    In practice most of each “bailout” tranche given to Greece comes back to ECB and IMF as they’re holding most of Greece’s toxic debt.
    So it’s a big Ponzi scheme and ECB is mostly bailing out itself, because in the case of default “real money” would have to be delivered by the EU governments to recapitalize the ECB.

  2. The answer to your first question is that nobody would. That’s why the government imposed capital controls (making it impossible to wire money out of the country or to otherwise transfer it to a foreign bank) and a €60 daily ATM withdrawal limit (limiting the ability to pull money from banks and hide it under the mattress or move it over the border as paper money).

    Essentially the only thing you can do with your deposits in a Greek bank now is transfer them to another Greek bank, e.g., by check, credit card, debit card, wire transfer. Fortunately, such domestic bank-to-bank transfers account for most of the transactions a bank in a modern economy makes anyway. Outside of the cash sector, such economic activity as goes on right now depends on Greek banks to intermediate payment of salaries, mortgage payments, corporate transactions, etc. If the banks were to collapse and the banking authorities didn’t step in to take them over and provide liquidity, the economy would more or less stop, because there wouldn’t be enough cash in circulation to support day-to-day transactions, most wealth (in bank deposits, in securities, or in large capital assets) would be frozen in place or gone altogether, and folks would hoard what cash there was available.

    As for the second question, as I understand it, the up to €82 – 86 billion provided through the European Stability Mechanism (ESM) is basically to roll over the existing debts owed to the ESM (basically the big European countries) and the IMF. Money will be flowing from the ESM and IMF to Greece and back to the ESM and IMF. In the short run, because the Greek economy (and tax revenue) has contracted significantly over the past few months, there will also be some financing of the Greek government’s budget deficit. The plan is for Greece to pay off a portion of the debt by privatizing assets, so once that privatization is done, the creditors should at least get that money back.

    Separately, the European Commission agreed to “mobilize” up to €35 billion under existing EU programs to fund investment and economic activity. I have no idea how much of this €35 billion would actually be new or how effective it would be.

  3. For a Greek citizen it does not make any difference if his money is in a Greek or “foreign” bank as long as the offices are on Greek soil. After the “rescue” is formalized the deposits in Greece will be somehow backed by the EU central bank. I do agree, for a Greek citizen with some money it would be a good idea to keep it outside Greece. Lots of Euros “sleep” in German and French banks after been wired from Greece at the end of the work day to be repatriated the next morning.

    The mechanics of the “rescue” are complicated. Just keep in mind that the GDP of the European Union (which includes countries not in the Euro) is around $15 trillion. The amounts involved in the Greek bailout are comparatively small. The political impact of whatever happens in Greece will be far more significant for EU workers than the cost of the rescue. For example, the amount to be contributed by Spain is about $10 billion Euros. That is far less than the cost that may have had for Spain a potential increase in borrowing rates caused by a Grexit.

    https://en.wikipedia.org/wiki/Economy_of_the_European_Union

  4. Enough people in Europe have to lose their jobs so the $96 billion they would make can sustain Greece.

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