Friday, June 24, 2011

Does the ECB Use Liquidity as a Weapon?

 Interest rates and money markets are moving up in the eurozone.  Yet, the ECB has continued to contract its balance sheet which has sporadically forced the EONIA above the ECB refi rate, which would indicate the ECB is contracting liquidity at the very time its member countries need liquidity.  Given the current problems with Greece, this is like, as David Beckworth has written, throwing gasoline on the fire.

I have previously questioned whether the ECB has used liquidity to force Portugal into a bailout and definitely used its purse strings to push Ireland into a bailout which nationalized Irish bank debt protecting core eurozone banks as senior bond holders. 

As Michal Darda elaborates in Beckworth's post, contracting the ECB balance sheet, contracting liquidity, and raising interest rates may be the right monetary policy for Germany and France, but it is the worst thing that the ECB could do for Greece, Portugal, Ireland, Spain, and Italy.  It is one thing to have banks in Ireland who threw risk management out the window and decades of political and private corruption in Greece and it is another to defend austerity to the destruction of the peripheral member countries by driving Portugal to bailout, Greece to the brink of default, and place cross hairs on Spain and Italy.  Just as inappropriate deficit reduction and tightened monetary policy in the United States in 1936-37 led to a depression within a depression, the ECB is following a confidence debasing path in the monetary base of its currency, which may very well result in an international loss of confidence in the euro and the need of the ECB to refinance itself.  But it is intent on making those outraged Greek "peasants" accept austerity and protect the core eurozone financial system --- at least for awhile.

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Tuesday, June 21, 2011

On the Supremacy of The Irrational: Pushing Greece to the Brink of Implosion

While Europeans saw the decision of the eurozone Finance Ministers to back away from a funding plan for Greece and demand an affirmative Greek vote and a further austerity program as a smart political move, other parts of the world saw it as yet another internecine failure to comprehend what is going on in Greece and the conditions of the Greek people.  Europeans refuse to consider that it is the euro which has driven Greece to its present state and believe Greece would enjoy no confidence from the international market if it defaulted whether within the euro or by adopting its own fiat currency.  Nor do they understand that a default within the euro would be a disorderly default, while a planned (is there enough time?) default with a fiat currency could be orderly.  The question of confidence is in how long the euro will continue destroying its current account balance deficit members with its refusal to adopt proper fiscal transfer mechanisms consistent with an economically efficient monetary union.

The essential and fundamental differences between a fiat currency and the euro have confused many commentators and economists, because they do not recognize the euro's failure to provide a fiscal transfer process creates a denial of national fiscal policy and how continued political demands for more and more austerity is destructive of aggregate demand creating a perceived lack of political will which engenders a growing lack of international confidence in the ability of the euro to serve the people of the eurozone.

While John Dizard dismisses Greek protests as just "striking civil servants" who will have no impact on Greek politics and incorrectly assumes that periodic monthly large withdrawals from Greek banks are runs on the banks and a banking crisis when there are no lines of clamoring depositors demanding their money.  He assumes a default is coming and that it will be within the euro and it will cause Greek banks to fail, because they own Greek debt, as do many individuals, pension funds, and foreign banks.  Wealthy Greeks, beginning for a period in 2010, have and are periodically moving money out of Greece, as well as other assets such as yachts, to avoid taxes and ordinary Greeks have started this year to withdraw deposits in order to maintain living conditions, i.e., they are devouring their savings, as we have written in this recent post.  This is consistent with a currency crisis, which is a lack of confidence, rather than a banking crisis.  The Greek protestors are a diverse group of union members. unemployed, pensioners, and small business people, who despair over the loss of sovereignty, threats to democracy and human freedom from eurozone proponents who demand political unity at any cost which cannot fix the euro, and living conditions which are spiraling down.  They have had enough of austerity and politicians who cannot serve the best interests of the people.

In order to protect the euro, Greece, Ireland, and now Portugal have been forced into austerity and bailout designed to defend core European banks.  Ireland was conned into accepting indentured servitude for its citizens.  Portugal has been duped into accepting austerity which the ECB demanded and which the Portugese may find unpalatable more quickly than desired.  Greece has been pushed and pushed to the brink of enslavement as the eurozone demands absolute fiscal control of Greece as core Europe continues to hide the capitalization needs of its large and smaller banks.  At what point will a people not fight back?

If Greece were to default, why would they not do so in an orderly process which includes withdrawal from the euro and redenomination of its debt in its own fiat currency, devalued in relation to the euro, which would protect its banks and citizens?  It would not be easy, but, if it were thoroughly planned, the substantive economic damage would be primarily contained to eurozone banks and foreign holders of private debt which would still be income producing.  This is not a scenario which I relish, nor one I have advocated, but the eurozone seems committed to implosion as long as it defends the euro as a currency without a fiscal transfer process and demands austerity and human misery of its less economically powerful members even if it means the destruction of sovereign rights to protect its citizenry and democracy.  I would much rather see eurobonds, a fiscal transfer mechanism, and coordinated investment from the European Investment Bank, as Rob Parenteau and Jan Kregel have written and/or tranche transfers, as Yanis Varoufakis has proposed, although I wonder if tranche transfers by themselves might just delay the end game.  Unfortunately, we do not live in reasonable times.  The Irrational rules.  Are we doomed to relive the currency crisis of 1931 Germany which was caused by a lack of political will and deficit reduction economic policies, which created an international lack of confidence in Germany's ability, despite a trade surplus, to pay international debts in a currency fixed to the gold standard?


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Thursday, June 16, 2011

Greek Bank Withdrawals Continue

In the first six months of 2010, we saw large withdrawals from Greek banks by what appeared to be wealthy Greek citizens who were taking their money out of Greece and perhaps the euro.  Domestic non-financial Greek corporations began a relatively steady withdrawal of time deposits in July 2009.  Non-euro residents began their withdrawals in June 2008 accelerating in December 2008.  Other euro residents to a lesser degree began a weaker pattern of withdrawals in December 2008.  A spreadsheet can be accessed at the Bank of Greece here (choose "breakdown by sector" in part A; then "deposit flows" in spreadsheet).

For the year ending March 2011, Emporiki, which is a subsidiary of the French bank Credit Agricole, saw its deposits decline 17.8% and Geniki, a subsidiary of the Fench bank Societe Generale, saw its deposits decline 12%.

One of the distinctions between a currency crisis and a banking crisis is that a currency crisis is a lack of confidence that prompts foreign depositors and investors to withdraw money but domestic depositors do not massively withdraw.  A banking crisis occurs when domestic demand depositors withdraw their money en masse.  The latter has not occurred.

However, since November 2010, Greek household deposits have declined 12,108 million euro through April 2011.  While some of this may be further withdrawals by wealthy Greeks, it appears that this series of withdrawals are probably by ordinary citizens for whom it is not efficient to take their money out of Greece.  It would appear that ordinary Greek citizens are finding it necessary to use their savings to maintain an acceptable standard of living.  With Greek unemployment in March at 16.2% and youth unemployment at 42.5% for Q1 unemployment of 15.9% or an increase of 35.1% from Q1 2010, it is not hard to understand the need of Greek households to reduce savings to live. With austerity imposing higher taxes, higher fees, lower wages, rising prices, and less work, Greece is venturing into the territory of desperation and riots with its government ready to fall as it seeks to pass another, deeper austerity program mandated by the EU, IMF, and ECB.

While you can read about Greek demonstrations when they turn into riots, there has been little to no mention of Greek domestic bank withdrawals in the Greek mainstream or government media.  The reports of domestic withdrawals have been in News247 on May 26th and sources citing News247.  In fact, there appears to be an official campaign to suppress economic opinions, debate, and information by the government which can only aggravate the tensions in a democracy and promote divisive argument.  Given recent proposals within the eurozone to strip deficit countries of fiscal decision making and place it with a central eurozone authority, to what extent is the eurozone becoming a threat to democracy and human freedom?

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