What Greece Could Do


J. W. Mason in Jacobin:

The Greek crisis is not fundamentally about Greek government debt. Nor in its current acute form, is it about the balance of payments between Greece and the rest of the world. Rather, it is about the Greek banking system, and the withdrawal of support for it by the central bank. The solution accordingly is for Greece to regain control of its central bank.

I can’t properly establish the premise here. Suffice to say:

1. On the one hand, the direct economic consequences of default are probably nil. (Recall that Greece in some sense already defaulted, less than five years ago.) Even if default resulted in a complete loss of access to foreign credit, Greece today has neither a trade deficit nor a primary fiscal deficit to be financed. And with respect to the fiscal deficit, if the Greek central bank behaved like central banks in other developed countries, financing a deficit domestically would not be a problem.

And with respect to the external balance, the evidence, both historicaland contemporary, suggests that financial markets do not in fact punish defaulters. (And why should they? The extinction of unserviceable debt almost by definition makes a government a better credit risk post-default, and capitalists are no more capable of putting principle ahead of profit in this case than in others.)

The costs of default, rather, are the punishment imposed by the creditors, in this case by the European Central Bank (ECB). The actual cost of default is being paid already — in the form of shuttered Greek banks, the result of the refusal of the Bank of Greece (BoG) to extend them the liquidity they need to honor depositors’ withdrawal requests.

2. On the other hand, Greece’s dependence on its official creditors is not, as most people imagine, simply the result of an unwillingness of the private sector to hold Greek government debt, but also of the ECB’s decision to forbid — on what authority, I don’t know — the Greek government from issuing more short-term debt. This although Greek treasury bills (T-bills), held in large part by the private sector,currently carry interest rates between 2 and 3 percent — half what Greece is being charged by the ECB.

More here.