"In the End Capital Controls Will Probably Have To Be Imposed in Europe" states Eurogroup official

The Greek Tradegy

Originally posted on zerohedge

17th February, 2015


With less than 24 hours until the ECB's meeting at which Mario Draghi and company are set to decide if i) they will increase the current Greek emergency liquidity allotment from €65 billion as a result of the ongoing bank deposit run or ii) reduce - or even outright cancel it - to send Tsipras a message that the time for negotiations is over, Europe is no longer playing Mr. nice guy. In fact, judging by the latest report in Reuters, which may well be nothing but another planted trial balloon (in the aftermath of today's latest Telegraph revelations one should read everything presented in the media, here certainly included, with a cape-size ship full of salt) Greece can kiss goodbye not only any a loan extension without a bailout "programme" resumption, but also any hope that tomorrow's its ELA will be increased. 

The reason: ze Germans.

The European Central Bank faces resistance from Germany to allowing any extra emergency lending for Greek banks, people familiar with the matter said, increasing pressure on Athens to sign up to an extended aid-for-reform programme.... the ECB's policymaking governing council will review on Wednesday how far the country may support its weak banks, which face rising deposit outflows.  While the ECB is unlikely to lower the ceiling on emergency lending assistance (ELA) by the Greek central bank, a refusal to increase it would nonetheless be bad news for Greek banks, which are close to using up the full 65 billion euros granted so far.

Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, is set to stick to this stance at the ECB meeting, the sources said. Some other governors have similar reservations.

Which means that the standoff will may well continue past midnight tomorrow. Now, in the worst case scenario, should the ECB yank all Greek ELA, then all bets are off, and on Wednesday it is unlikely that any banks will reopen in Greece, which incidentally would likely lead to an immediate compromise by the new PM and FinMin, unless of course they are prepared for this contingency and reveal a new €100 billion or so loan from the BRIC bank, compliments of Vladimir Putin.

But even in the less Draconian case, one in which the ECB decides to remain merciful for 10 more days, the outcome is not much better: "Unless Athens agrees an extended aid programme soon, keeping ELA capped would put lenders in a funding squeeze that could require the introduction of capital controls to limit savers taking out more of their money, the sources said."

As noted earlier, the bank runs may (or may not: depending on one's agenda), have accelerated in the past few days:

A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.

There was a lull on Monday but deposit outflows picked up again on Tuesday after talks collapsed, the banker said.

One thing is clear however: Greece will almost certainly not last until the proverbial D-Day on February 28 before it either i) runs out of money, ii) is forced to sign a "bailout extension" deal with the Eurogroup thus crushing its credibility with the people, or iii) exits the Eurozone. Needless to say, two of the three above options are very unpleasant for Greek savers, assuming any are left. And it is those savers that the Eurozone is directly targeting when it does everything in its power to provoke a bank run with statement such as these:

"The situation of the banks is getting more and more difficult every day," said a European official. "In the end, in order to safeguard the banking system, capital controls will probably have to be imposed."

 And to think a comparable statement about any other peripheral Eurozone country, all of which are as insolvent as Greece, would be met with howls of murderour rage and demands for a death penalty on account of provoking a bank run panic.

 Not Greece though: for the small country that dared to provoke Goliath, anything and everything is fair game.

The ECB's chief economist Peter Praet has cautioned that the funding is for the short term only, although Austria's central bank chief Ewald Nowotny recently signalled that the ECB would resume direct funding if Athens struck a deal to extend its EU/IMF bailout.

Frustration with Greece is growing. Euro zone finance ministers have given Athens until the end of the week to request an extension or lose financial assistance when the bailout expires at the end of February.

Were the ECB to cancel all emergency funding for Greek banks, as it threatened to with Cyprus in 2013, it would leave Athens with no choice but to strike a new deal with its international backers or face bankruptcy.

But the ECB would be very reluctant to take such a step.

In short: Europe suggests Greek panic.

But here lies the rub, because despite the market's complete lack of willingness to react, pardon "market", since every risk asset is now exclusively controlled by the world's "developed" central banks, kicking Greece out would - without doubt - lead to the worst possible of Mutual Assured Destruction outcomes. 

"Pulling the plug on Greece would have potentially catastrophic consequences," said Ashoka Mody, a former IMF official who helped design Ireland's bailout.

"The ECB's threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it."

 And that particular game theory outcome is precisely what the non-game theory playing finance minister is betting the farm, and the nation on. The one where it ultimately costs Europe far, far less in current certain costs, than the "unknown unknowns" of the worst case scenario that will be revealed once the Eurozone is effectively no more. This is how Goldman described a world in which Greece is kicked out: 

... ‘Grexit’ would constitute a non-diversifiable event, affecting all financial assets. This is because, upon the departure of one of its members, EMU would likely be seen as a fixed exchange rate arrangement between countries which can elect to adhere or leave. Convertibility risk would resurface, exposing the possibility of a collapse of the entire project.

To be sure, the ECB would not stand idle in the face of such a course of events. But the severity and persistence of the ‘shock’ from Grexit would depend on several factors, which include:

  • What has led to the departure of Greece (metaphorically, was the country pushed or did it jump?).
  • What institutional arrangements the remaining countries put in place to signal their commitment to stay together (presumably in the form of greater sovereignty sharing).
  • How does Greece perform outside of the single currency?


So even as Europe is throwing the kitchen sink at Greece in hopes of sparking a bank run, it should be very careful what it wishes for. Because a nation with nothing left, with no hope, is far more dangerous than the servile debt-slave Europe expects Greece to be. And if as Goldman suggests, a Grexit has far greater and far more negative consequences for Brussles than Athens, then Varoufakis' gambit will be spot on, and Europe will be begging Greece to stay, or return, before all all is said and done and the European project is cast away on the every larger trash heap of failed neo-liberal ideas.