The ECB has to maintain ELA to Greek banks

Despite the shamelessly dishonest press barrage from the conservative owners of the highly concentrated Greek media (the ‘oligarchs’) to vote YES; despite many articles popping up in world newspapers about how the Greeks are to blame for their own problems because they overspend and undertaxed; despite the lies coming from other European leaders about what the vote was about (it was not about leaving the Euro but rather about whether the Greek people wanted further failed austerity); despite the ridiculous claims of the German SDP about “bridges being burned” (that party should change its name because it is a disgrace to the social democratic tradition) – despite all of that and heaps more, the Greek people voted overwhelmingly NO to reject austerity as a viable policy model for their country. This is a case of democracy coming head to head with the dominant political-economic ideology within which the Greek nation is situated – the Eurozone. It also demonstrates the flaws of the democratic process – the people have voted for an end to austerity but also consistently tell opinion polls they want to remain in the Eurozone, a monetary system that is built on austerity. They voted yesterday to reject the very basis of the monetary system they want to stay in – which tells us they don’t really understand the nature of the system and therefore how informed is the NO vote.

On the seeming inconsistency of the Greek vote, Please read my blog – The incommensurate aims of the Greek people – for more discussion on this point.

But given all of that, I do not agree with the interpretations which say that Greece has chosen between “catastrophe or absolute catastrophe”.

That is the line taken in the UK Guardian article (June 5, 2015) – Our Greek referendum offers catastrophe or absolute catastrophe. Some choice.

I also do not agree that the Greeks have lost the ‘wrestling’ match with its Eurozone partners (the latter term used very loosely to describe powerbrokers in the Eurozone).

If one reads the latest edition of Der Spiegel, the article (July 3, 2015) – Angela’s Ashes: How Merkel Failed Greece and Europe – gives some pause to accepting the catastrophe interpretations.

The decision to call a referendum really challenged the bullies in the Eurozone – pushed them off the script that they have been following for some years now as they dealt with nations suffering from a severe shortage of overall spending and rising unemployment.

The call for the referendum blew the idea that the bullies could just threaten these nations with bankruptcy – which was an idle threat anyway given that they blow up their own system if enforced, out of the water.

The script demanded that nations buckle under and cut public spending and savage safety nets and all the rest of the aspects of social development that the likes of the IMF has hated since it was overtaken by neo-liberal economists some time in the 1970s.

The decision to allow the people to actually make an explicit statement about that has altered power relations significantly in my view.

And I don’t accept the narratives that the referendum was poorly worded, too long, was referring to a non-existent package given the last document was withdrawn on June 28, 2015, and all the rest of the claims made by those who fought to keep the Greek government and its people on ‘script’.

It is obvious what they were voting for. They were saying NO to the cruel, senseless and failed economic policies that have killed jobs, undermined retirement incomes, and created a vacuum for the youth of the nation to develop skills, work experience and transit into adulthood with good prospected. And all the rest of the ravages of austerity.

One might have a different view if the austerity was ‘working’ (whatever that means). But the Great Greek Depression continues and all the forward estimates from the IMF and the EU indicated that unemployment will be above 20 per cent for years to come.

The policy framework was unambiguously not working. The vote of NO is to reject that and demand a policy framework that will help restore growth and cut unemployment.

I consider the question of ‘debt relief’ also to be somewhat overstated given that it will do nothing in the short-run to allow the economy to resume sufficient growth to quickly reduce unemployment. Wiping off the mostly long-term, low interest rate debt will do little to restore demand.

The Greek government up until about now has already been running fiscal surpluses net of the interest payments. Providing some interest relief won’t alter much in the short- to medium-term. I realise that it might change psychology considerably and for that reason alone the ECB should announce immediately that it will wipe off all the Greek government debt it holds.

As as my Tweet the other day says:

The IMF has a particular criminality in all of this. They should be paying out massive damages rather than bullying nations into creating more poverty and taking any revenue that nation can raise to pay back so-called ‘debts’.

The fact that after the negotiations were called off, the IMF released under pressure from the US (who are the biggest funders of the IMF) to publish the – Greece: Preliminary Draft Debt Sustainability Analysis – (July 2, 2015), shows how political all this has been.

The analysis should have formed a core part of the negotiations given it showed how bleak the debt situation was for Greece in the long-term. I also note that the IMF was explicitly lobbied by the European Commission not to release this Report.

Groupthink hates information. Groupthink hates anything that contests or undermines the prevailing ideological viewpoint. Groupthink, though a bullying mob rule is, in fact, a highly insecure organisational state.

Information is power. The European Commission hated the idea that the IMF would come clean on what they thought was the reality of the Greek situation. That may not be the actual reality, given the IMF is prone to massive errors itself.

But the point is that the European Commission knew the information would highlight their bastardry in the negotiations process leading up to the referendum and weaken their claims that a YES vote was essential for future Greek prosperity.

So while the Eurofin ministers were lying about what the demands they were making on the Greeks were about (Dijsselbloem had the temerity and gall to actually claim they were not asking for pension cuts), the IMF was revealing why they were refusing to talk about debt relief for the Greeks.

Why? Because even the IMF realises that it has to be written off or delayed for the next two decades or so.

But despite all of that, the real issue which is a Eurozone-wide issue is a lack of aggregate spending (demand) which is causing output gaps (actual output relative to potential) to remain at excessively large levels.

In turn, the persistence of the output gaps has undermined private investment in capital formation and fiscal austerity has undermined public investment, which together have caused potential output levels to decline.

That has the effect of reducing future growth rates and means that to wipe out the excessively high unemployment, lower productivity activities are required.

In their own way, the Greek people know that and want policies to change to start addressing the central economic problem. What they do not seem to realise is that the problem is the Euro itself, given the way it was introduced and the system that supports its.

The NO vote will not alter the austerity bias. Even the Greek government was prepared to accept continued austerity late last week as long as there was some debt relief.

Syriza’s claims to be anti-austerity were shown to be somewhat at odds with the reality of the approach its leader made just before the referendum to the Eurogroup.

Greece needs to be running large fiscal deficits – debt relief or not. Running primary surpluses will continue the suffering. I know they want the fiscal stimulus to come from outside the nation – via the Euro investment fund etc. But that is not going to happen anytime soon, in quantities that one might deem stimulative.

So with the external reality set, the Greeks have to be able to run deficits (primary and overall). Otherwise, it will continue to fester.

The other interesting narrative (I noted the Greek Finance Minister has just announced his resignation!) is the “all eyes are now on the ECB” line.

Now that Greece has rejected austerity – so what? The banks are still about to become insolvent unless the ECB announces it will continue to ensure they have sufficient liquidity in euros to meet their day to day demands.

Here is my view on that.

The ECB has to maintain liquidity in the Greek banking system. If it refuses then Greece would have to immediately issue its own currency and recapitalise the banks accordingly. That is, the ECB would take the political act to force the nation from the Eurozone without any rules in any European treaty suggesting that is part of its mandate.

More particularly, what would the decision to end the Emergency Liquidity Assistance (ELA) for Greek banks indicate? It would indicate that the ECB has failed in its primary role to maintain financial stability in the Eurozone, of which Greece remains one of 19 Member States.

I remind everyone that the – Tasks – (the Charter) of the ECB within the Euro system is well-defined by the Treaty of the Functioning of the European Union.

The Statute of the European System of Central Banks and of the European Central Bank is one of the protocols attached to the Treaty.

There are nuances because some of the central banks did not join the euro but they are not at point here.

It is very clearly specified in Article 127(1) of the Treaty that:

The primary objective of the European System of Central Banks … shall be to maintain price stability”.

Clear enough?

They will do this, according to Article 127(2) through:

– the definition and implementation of monetary policy for the euro area; – the conduct of foreign exchange operations; – the holding and management of the official foreign reserves of the euro area countries (portfolio management); – the promotion of the smooth operation of payment systems.

Additionally the ECB is responsible for “the prudential supervision of credit institutions established in participating Member States” and “has the exclusive right to authorise the issuance of banknotes within the euro area”.

That is about it.

It is not responsible for enforcing European Commission dictates with respect to the Member States about fiscal policy, labour market policy, product market policy or anything else like that.

The fact the ECB joined the Troika demonstrated that the neo-liberal concept of independent central banks is another one of those myths that allow policy makers to deflect responsibility for poor decisions that damage the prospects of people.

But the legal responsibilities of the ECB make it impossible for it to allow the Greek banking system to go broke. That is one of its core legal responsibilities.

If it does take the extraordinary political decision to stop ELA funding to the Greek banks then it demonstrates how badly designed the Euro monetary system is. To allow the central bank to flagrantly ignore its basic legal charge and to pursue politicial aims that are outside its remit would signal a catastrophic failure of the common currency.

There are those who claim the ECB faces massive losses if it continues to provide ELA. The same arguments apply to its bond buying schemes under the various titles since 2010.

Please read my blog – The ECB cannot go broke – get over it – for more discussion on this point.

Any suggestions that a state of ‘negative capital’ would alter the operational capacity of the ECB as a lender of last resort (as the currency issuer) are lies.

It always has to ensure the banking system is liquid – by providing necessary reserves to maintain the payments system and allow for deposit withdrawals – whether it has negative capital or otherwise.

The other side of that logic is the old – cutting off the nose to spite the face – trick.

If the ELA is terminated, Greece exits. Simple as that. They would have no choice. Then all Greek government euro-denominated debts would be either restructured into the new currency or simply wiped off by the debtor. It therefore makes no sense to fear default and then follow an action that guarantees that very state.

In that sense, I do not believe the NO vote will see the ELA withdrawn. There will be threats, fear mongering and all the rest of the bullying tactics that have been witnessed over the last several years.

Germany will be making noises. Jens Weidemann will rave on about hyperinflation and printing money. Others will try to say the bridges are burned.

But the ECB will have to continue to act as a central bank according to its legal charter or place itself in a position of legal threat – for malpractice – and plunge the very system its is charged with safeguarding into a terminal crisis.

As an aside, given the discussions about clientelism in the Greek media, where the politicians maintain policies that expand the interests of the oligarchs as a quid pro quo for funding and headline support, I thought I should learn a bit more about the state of the newspaper industry in Greece before and after the crisis hit.

You can get very comprehensive data from the – Athens Daily Newspaper Publishers Association.

The 1990, there were 19 daily newspapers (excluding niche finance and sport) with an average daily circulation of 834,415. The top 4 publishing groups (Lambrakis Press, Kathimerini Publishing, Ch. K. Tegopoulos Editions and Pegasus Publishing) accounted for 59 per cent of the circulation.

By 2006, there were 26 dailies with an average daily circulation of 404,715. The top 4 publishing groups accounted for 69 per cent of the circulation.

The number of titles shrank dramatically over the next few years as the crisis hit and by 2015 there are now only 13 daily newspapers, which might seem like a lot for 11 million people but it is all relative. The average daily circulation is now down to 95,644 and the concentration of the industry has declined somewhat sharply as circulation has dropped and bankruptcy has followed.

The following graph shows the decline in average circulation since 1990.

Conclusion

I was very heartened by the NO vote success. I am not so about the resignation of the Finance Minister. I am also suspect of the motivations of the Greek government but will wait and see.

The letter the Prime Minister sent to the Eurogroup just after calling the referendum where he said he would accept the demands as long as debt relief was provided was a bad augur.

We will see.

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That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.