The Greek government is running a primary surplus. That is, tax revenues exceed spending. That surplus is currently approaching a whopping 4.5% of Greek GDP.
Consequently the new Greek government could simply slow down or stop paying interest on their public debt. Nothing terribly bad would happen directly. The Greek government would find it even more difficult to borrow, but that's not actually a problem when you're running a budget surplus, and borrowing is already difficult.
So I think it likely that the new Greek government will take this step, preferably with the grudging acceptance of other European governments but without that acceptance if necessary. Grudging acceptance means the new Greek government slows down interest payments (with partial debt write-off), and non-acceptance means the new Greek government blows off much more (or even all of it). But those are the two choices.
With non-acceptance the ball then lands squarely in the European Central Bank's court. Greek banks depend on the ECB as the "lender of last resort," the institution that provides them with liquidity so that they can issue euro cash to nervous depositors steadily pulling their money out. (Note that the new Greek government is implicitly giving depositors space to pull their euro out, with the ECB's help, and that's what I'd be doing.) The ECB would have the technical ability to stop performing this vital role. Would it?
There's some legal question. Another problem is that, even today, a systemic failure among Greek banks probably would cause bank runs elsewhere in Europe. There's a lot of brave talk that the ECB could allow Greek banks to fail, but does anybody remember the same brave talk about allowing Lehman Brothers to fail? How did that work out?
I don't think the ECB will blow up the entire Greek banking sector, even now. If I'm wrong, though, then the Greek government simply declares a nationwide bank holiday much like Cyprus did, possibly nationalizing the banks in the process. When the government allows the banks to reopen there will either be severe withdrawal limits gradually relaxed or new drachma in those accounts, maybe even a new drachma crypto currency but, unlike the dreadful Bitcoin, with a monetarily sound inflation rate. It turns out that, nowadays, you don't actually have to issue paper bills and metal coins when you want to launch a new currency. Greeks have smartphones and EMV ("chip") ATM/debit cards, and that's all they need for their new drachma if it comes to that. A side benefit to making all physical cash transactions in Greece totally illegal is that tax evasion becomes more difficult.
Congratulations in advance to Greece on taking steps to end this austerity madness.
Consequently the new Greek government could simply slow down or stop paying interest on their public debt. Nothing terribly bad would happen directly. The Greek government would find it even more difficult to borrow, but that's not actually a problem when you're running a budget surplus, and borrowing is already difficult.
So I think it likely that the new Greek government will take this step, preferably with the grudging acceptance of other European governments but without that acceptance if necessary. Grudging acceptance means the new Greek government slows down interest payments (with partial debt write-off), and non-acceptance means the new Greek government blows off much more (or even all of it). But those are the two choices.
With non-acceptance the ball then lands squarely in the European Central Bank's court. Greek banks depend on the ECB as the "lender of last resort," the institution that provides them with liquidity so that they can issue euro cash to nervous depositors steadily pulling their money out. (Note that the new Greek government is implicitly giving depositors space to pull their euro out, with the ECB's help, and that's what I'd be doing.) The ECB would have the technical ability to stop performing this vital role. Would it?
There's some legal question. Another problem is that, even today, a systemic failure among Greek banks probably would cause bank runs elsewhere in Europe. There's a lot of brave talk that the ECB could allow Greek banks to fail, but does anybody remember the same brave talk about allowing Lehman Brothers to fail? How did that work out?
I don't think the ECB will blow up the entire Greek banking sector, even now. If I'm wrong, though, then the Greek government simply declares a nationwide bank holiday much like Cyprus did, possibly nationalizing the banks in the process. When the government allows the banks to reopen there will either be severe withdrawal limits gradually relaxed or new drachma in those accounts, maybe even a new drachma crypto currency but, unlike the dreadful Bitcoin, with a monetarily sound inflation rate. It turns out that, nowadays, you don't actually have to issue paper bills and metal coins when you want to launch a new currency. Greeks have smartphones and EMV ("chip") ATM/debit cards, and that's all they need for their new drachma if it comes to that. A side benefit to making all physical cash transactions in Greece totally illegal is that tax evasion becomes more difficult.
Congratulations in advance to Greece on taking steps to end this austerity madness.
