Greek Debt Crisis – Why Greece/Europe Can Live Without “The ECB Banking System”

Reuters has a very broad article today outlining he possible consequences of a Greek exit from the Euro currency.

It has lots of big points but ultimately I am left with the thought “so what?”

Fundamentally the article is talking about something that is completely irrelevant to Europeans and Greeks. Well it would be if Greek and Europeans were not having to pick up the pieces of the ECB’s mistakes

Here are some of the highlights

“In the event of an exit, they (Greece) will default. And the loss given default will probably be very high, high enough to eliminate the ECB’s capital,” said Andrew Bosomworth, senior portfolio manager at asset manager Pimco.

Okay, the ECB gets wiped out. I do not see the problem. As long as savers have their cash everything can continue as is.

You also have to bear in mind that PIMCO are heavily into government debt so you can be sure that anything that affects government is going to effect them. They have vested interests in their statements.

“They might need recapitalization from governments, who are not exactly in the best position to provide additional capital.”

Those are not the only losses the ECB and its national shareholders might face as is explained in detail below.

Why will governments ie taxpayers need to recapitalise anything? Europe is supposed to be a capitalist system no?

PIMCO is supposed to be a major player in this supposed capitalist system so why on earth does PIMCO believe seizing the wealth of Europeans through devaluation/inflation of the Euro helps Europeans?

Surely the whole point of capitalism is that people are free to do what they think is best?

To say governments have to recapitalize banks is a communist statement. It is saying the wealth of Europeans will be used by governments to do what they think is best.

Since when was that capitalist? ie governments seizing the wealth of citizens to put it to use in the way it sees fit.

Even once Greece had left the currency club, the costs to the rest of the euro zone would continue to mount as it would probably be compelled to avert a complete Greek collapse and wider contagion.

Sorry, but how is Greece going to completely collapse?

Is the labour and resources of Greeks suddenly going to be wiped out overnight?

Is Greece going to suddenly be stripped away of all it’s technology and machinery overnight?

Of course not.

The only thing that will collapse in Greece is the central government and I think most Greeks will agree, that will not be a bad thing.

Of course the Greek government could propel the country into a very bleak situation if they did not eliminate all central governments taxes post default.

The choice is theirs. If they are interested in the health of the country they will eliminate central government.

If they are interested in trying to maintain their own grip on power, no matter what the cost to the average Greek, then yes, the country will collapse.

There is a choice here, let us not assume Greek politicians are power-hungry above all else, they do have the opportunity not to self destruct their own economy, it’s their choice.

“Large-scale ECB intervention would be necessary to stabilize the system, along with intervention from Germany, the European Stability Mechanism (ESM), its predecessor the European Financial Stability Facility (EFSF) and the IMF, potentially costing hundreds of billions of euros,” said Georgios Tsapouris, investment strategist at Coutts.

Why do these banks think it is preferable for them to get the money from taxpayers rather than the taxpayers having it themselves?

And this is not mentioning the simply gigantic moral hazard it creates. The moral hazard of taxpayers being forced to bail out private banks.

And this is also ignoring the fact that the money that these banks are asking for from government will actually be borrowed from these same banks, on which the banks will charge the government interest.

Let me put it another way, you could argue, that far from being a negative situation for banks, if they find they can get governments to run up huge debts, with interest, which in turn, the governments give straight back to the banks, you could argue that this bailout mentality is a genius bit of corporate strategy. If you are a banker.

The ECB, which has its own paid-in capital of 6.4 billion euros, is essentially a joint venture between the 17 euro zone national central banks (NCBs). Combined, the Eurosystem of euro zone central banks has capital and reserves of 86 billion euros.

Sorry, but where does the ECB get its money from in the first place?

I’ll give them a pass on the monopoly on the production of currency.

Can you guess where the ECB gets its money from? Yes, you got it, depositors in banks which is me and you and the interest we pay on national debts.

So not only has the ECB lost billions of depositors/taxpayers Euros, it is saying that depositors should give yet more money to bail it out because it have lost the money of the depositors/taxpayers

I don’t want to labour the point here but I think it is important to make it absolutely crystal clear whose money we are talking about here.

And just so you know I am telling the truth, the article continues

A Greek exit from the euro zone could cost the French taxpayer up to 66.4 billion euros and saddle the country’s banking system with 20 billion euros in lost loans, according to a study published on Tuesday by the IESEG School of Management in Lille.

And the madness continues

Under a scenario described in German weekly Der Spiegel, the euro zone’s EFSF bailout fund could be used in the event of a Greek default to continue funding Greece’s debt obligations to the ECB.

Even I could not believe this.

So billions of Euros of European taxpayers money will be taken to give to the ECB because the ECB has lost billions of Euros of taxpayers money?

Am I crystallising the point now?

You have the ECB making interest on the loans it gave to governments so governments could give the money back to the ECB, and you have the ECB making interest on the loans it gives to governments so governments can give back to the ECB to compensate the ECB for the money it lost that belonged to depositors & taxpayers.

It’s a crazy situation which sees the ECB and the private banks making money on both ends in a no-lose situation.

However, this would eat into the resources of the ‘firewall’, eroding its capacity to help other euro zone states which might well need to be protected if a Greek exit sparked contagion.

Sorry, what? Help euro zone states by getting them up to the neck in debt. Again, sorry, but why would any sane government think the ECB is helping them?

And again, I don’t want to labour the point, but where exactly did the firewall money come in the first place? Yes the taxpayer.

So you have the taxpayer paying interest to create a “firewall” which in turn will be lent back to the taxpayer at interest.

Does anyone else see the problem with this picture?

The Bank of Greece and other peripheral euro zone countries have built up liabilities within the euro zone’s cross-border payment system, TARGET2, due to a net outflow of payments to other countries in the bloc, a trend exacerbated by the debt crisis.

Yes, and this is news? Didn’t they spot the 20 billion Euro a year Greek trade deficit?

How exactly did they think the Greek government was financing the deficit if not through debt/liabilities in “the euro zone’s cross-border payment system, TARGET2”?

“If they see that Greek savers have seen their euro savings overnight being converted into drachma, which could depreciate by 50-70 percent, then it would be a fairly simple hedge strategy for them to take out some of their savings and put them into Luxembourg, or pounds sterling, or Swiss francs,” said Bosomworth.

Again, shallow statements declaring big things. Why exactly would the Drachma devalue by 50-70 percent overnight?

Only one way this can happen. The Greek central bank prints excess cash.

Only one way it needs to happen, the Greek government not slashing taxes post default.

“What they can do is try to prevent contagion – where they have a very significant role – and they will probably also try to convince participants on all sides to keep Greece in the euro area,” said Citigroup economist Juergen Michels.

And the contagion issue is brought up. Why is the fact that nobody in the mainstream media is questioning this obvious floor in the current central banking business model?

If Toyota, Opel, Ford, VW, Fiat, Nissan, Honda, Suzuki, Subaru came out and said “we have all been working so closely with General Motors, if GM failed we could all go out of business” you can bet that every man and his dog in the media will be asking why have these so-called competitors been working as a cartel and asking what effect has this had on the consumer through price-fixing and lack of innovation.

But for some bizarre reason, cartel like behaviour amongst banks, which are supposed to be competitors, is never ever questioned.

Again, something is seriously wrong with this picture.

Why are European taxpayers & savers being asked to bail out a system which is obviously such an impediment to their financial well being?

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