Dramatization, capitulation, rupture

Note kindly translated by Anne-Marie de Grazia


We shall soon know by Sunday, July 12th, the fate reserved for Greece. But it is possible to make some remarks on the present situation, particularly on its « dramatization », with which the medias, in France as well as in Greece are playing today broadly. This dramatization meets an evident political objective, Jean-Claude Juncker having, once more, welcomed at Brussels the leaders of two opposition parties (New Democracy and To Potami), showing again how little he holds of democracy, when these two parties have been losers in the July 5th referendum. The European authorities play upon this dramatization in order to try to regain some of the terrain they lost through the massive victory of the « no » at the referendum. But it could also serve to justify a « capitulation » of the Tsipras government, one which would put him in difficulty considering the breadth of the success obtained by the “no.” It is clear that, if the Greek government came to accept the unacceptable, the leonine conditions put up by the Eurogroup, and one can understand the reasons which could push it to do so without agreeing with them, it would find some difficulties in having them ratified by the Parliament without the support of the opposition. Let’s say so: such a capitulation, even if presented as a “lesser evil” in face of the paralysis which is taking over the Greek economy a bit more every day, would be a capitulation before the European and Greek oligarchies.

And yet, there is indeed an alternative to this capitulation, but at present, it must take radical forms.


The Greek banking crisis

The Greek banking crisis is largely the result of the action of the Central European Bank which has, at first, limited its support, then begun to depreciate the collaterals offered by the Greek commercial banks. This crisis is less linked with the control of capitals then with the rarefaction of liquidities in the Greek economy. As it happens, a modern economy cannot function without liquidities. In fact, Greece finds itself in the situation of a solvent company (it is making a primary surplus) which is also illiquid.

The solution, facing this programmed destabilization of the Greek economy and of the Greek society by the action of the monetary institution in charge of assuring monetary stability, may take two forms. The first, and most radical, would consist in requisitioning the Bank of Greece (the Central Bank). This solution would permit to liberate the reserves of banknotes held by the Central Bank as well as those held under its control in commercial banks. The second solution requires the emission by the Ministery of Finances of IOUs which would be accepted as instruments of payment by all public administrations. Either with the first or with the second solution, Greece would formally remain in the Eurozone. The IOUs put in circulation would of course be made out in Euros.

But one must understand that these solutions would bring Greece a little closer to an exit from the Euro. If it proceeds to a requisition, the ECB will be in a position to claim that the treaties have been violated. They were, indeed, by the action of the ECB itself, which is today clearly established. But one must harbour no doubt that, at the ECB as well as at the Eurogroup, it would be considered that this corresponds to a total break-up. If Greece puts into circulation IOUs, these latter will undergo a devaluation which could be the more considerable as there would be no Central Bank to guarantee their value. So that, without fail, these « euros » emitted by the Ministry of finances would be considered a « second » currency, and its devaluation would prefigure the one of the Drachma which one would have to reestablish fairly rapidly. In truth, one may doubt that these IOUs would be really representative of a new currency, backed by a true Central Bank. When one looks at the commercial balance and at the current balance of Greece, one can see that if the country were to find back its currency, the depreciation would be limited in relation to the Euro, between -20% et -25%. But the depreciation of IOUs could reach -50% because of the limitation and of the circulation specificities emanating from the Ministry of finances.

In fact, wanting to resolve a liquidities crisis without controlling the Central Bank is not only inept, it is dangerously so. If one has to get out of the Euro, better do it directly. Which is why, in reality, the only viable solution in face of the present destabilization and crisis of liquidities is not the emission of IOUs but indeed the requisition of the Central Bank, but also, very probably, of the commercial banks. We can see here that the most radical solution in appearance constitutes the most reasonable solution. This is one of the characteristics of crisis situations.

The government of Alexis Tsipras will have to make up its mind quickly, certainly before Monday, July 13th.


What about a Grexit?

As we said already, this requisition would probably be the pretext for the European authorities to act out the expulsion of Greece out of the Eurozone. However, the authorities would have a big problem to settle. Indeed, the Greek government could state its will to default totally on its debt, in case it were expulsed from the Eurozone. At any rate, a default is necessary. The Greek debt, since 2010, has been mostly emitted under « non-Greek » law. This is a fundamental difference with the situation in countries such as France and Italy. The lex monetae could then not apply. One would therefore necessarily have to proceed to a default on at least 50% of the debt. But, if the default should turn out to be total (or reach in the end 80% of the nominal value of the debt), the consequences for the creditors would not be negligible, especially if one adds to this default the weight of the debts in the ECB and Target2 accounts systems.


Outstanding debt by country, in billion euros

Total bilateral + FESF + MES Eurosystem (including Target2) Total
Germany 63,5 31,1 94,6
France 47,9 24,4 72,3
Italy 42,0 21,3 63,3
Spain 28,3 15,3 43,6
Netherlands 13,5 6,9 20,4
Belgium 8,1 4,3 12,4
Austria 6,7 3,4 10,1
Finland 4,4 2,2 6,6
Slovakia 1,9 1,3 3,2
Portugal 1,8 3,2 5,0
Slovenia 0,9 0,6 1,5
Ireland 0,8 2,0 2,8
Estonia 0,5 0,3 0,8
Malta 0,3 0,1 0,4
Cyprus 0,2 0,3 0,5
Total 220,8 116,7 337,5

Sources : BCE and Eurostat


Greece would then be in a good position to negotiate these conditions which would make out of its expulsion a negotiated exit (granted « ex post » and not « ex ante »). This would put Greece in good conditions to find back to strong growth. It could use part of its primary surplus to make investments of which it has an urgent need. Moreover, with a depreciation of -20% à -25%, Greece would become extremely attractive for foreign capital, be it in industry (such as in naval repairs), in agriculture or in tourism.

There is, from all evidence, a life outside the Euro, and a life after a default. What is important is to know how to organize it soonest. What Greece cannot live through any longer, though, is the continuation of a hopeless situation, aggravated today by a complete crisis of liquidities organized by the ECB.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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