10th July 2015

Four million vote for a €20,000 gift

Written by Graham Bishop

Greek ‘No’ voters scored 61% of the vote on a surprisingly low turnout of 62% of the 9.3 million eligible voters. The concept is now quite clear: Greek PM Tsipras will claim that the 3.6 million Greeks who voted ‘No’ should now be entitled to debt relief from the rest of the eurozone – leaving aside the poorest states in the world who will have to pay their share of the IMF’s portion of the desired ‘debt relief’.

Eurostat statistics show that the Greek minimum wage in January 2015 was nearly €700 per month – higher than five other euro members, and double that in Lithuania or Latvia. This discrepancy is still extremely pronounced even after the 22% cut in 2012. Thus 4 million ‘rich’ Greeks have voted for debt relief – without specifying the proportion of forgiveness – on the euro area’s exposure that is now close to €250 billion once the ECB’s Emergency Lending Arrangement (ELA) exposure is included. Technically, these are loans to the Bank of Greece – guaranteed by the Greek government – but with collateral. Exactly what this collateral will be worth in even a ‘modestly bad’ case scenario is debateable.

However, the euro area already knows the Greek government’s approach to the private sector where “private sector involvement” (PSI) turned out to mean a `haircut’ of around 75% in value. So it is plausible to see that the euro area will have to pay off the full amount of the loans on schedule and only receive 25% from Greece over `a period’ – a loss per euro area voter of about €750 each. Alternatively, this could be described as a present via taxation from the 250m euro area voters of close to €20,000 per Greek voter. US commentators might wish to apply the 200-year-old concept of “no taxation without representation” and argue for a referendum of euro area voters on such a tax.

This is the charged political backdrop to a series of intensely technical decisions about the solvency of Greek banks. Without extra support from the ECB, it is difficult to see how they can meet their obligations to their depositors – the usual definition of insolvency. Moreover, that will also cast doubt on the value of their Deferred Tax Assets – about 40% of their capital. Their exposure to the Greek government totals around €34 billion – out of capital and reserves of around €75 billion. So a formal default by the Government itself puts the Greek banking system into even more extreme difficulty.  How long can the SSM avoid recognising this situation? Can it even go to the end of July unless the euro area agrees a new package with the Tsipras government? This would precipitate a cessation of ECB support for the banks and a collapse of the economy – taking it back to bartering with the existing (though substantial) stock of euro banknotes within Greece.

The political problem for the euro area’s statesmen and women is that a gift of the magnitude that Greek voters want to give themselves is the permanent destruction of any credibility for the euro area’s economic governance system. Greek voters may not have realised what they were demanding – it is far too high a price for the euro area to pay. It should not pay.

This article was first published on www.grahambishop.com on 6 July 2015.