Rather than focus on the blow-by-blow developments of the umpteenth meeting in the Greek crisis, here are some higher level issues that often get lost in the summitry din:
- At the moment, the parties are negotiating over a disbursement of €7.2 billion. This is the last €7.2 billion to be received by Greece as part of the second bailout package, a package which totaled €130 billion. However, even if this €7.2 billion is received, Greece will need a third bailout package of at least €30 billion, likely much higher. Greece's debt talks aren't even close to completion, even if we get through the next few weeks.
- Polls show that Greeks want to stay in the euro.
- If Greece leaves the euro, the euro is no longer irrevocable. There is great strength to irrevocability. But if it's questioned, then during a future crisis members of the public will be more likely to take their money out of the banks while they still have a chance. Bank runs will become more likely, making any future crisis harder to handle.
- The European Central Bank (ECB) is neck deep in this. At the moment deposits are gushing out of the Greek banking system. To replace these funds, the Greek banks are borrowing from the Greek central bank, with the required blessing of the ECB. However, if the Greek Government is unable to pay its debts, the ECB may change the terms of this borrowing, to the detriment of the Greek banks. Most obviously, the ECB could increase the 'haircut' on Greek Government bonds that are used as collateral, reducing the amount the banks can borrow. However, there are other conditions and other types of collateral the ECB can play with. Material changes to conditions would likely send the banks into bankruptcy, and consequently the Greek economy further into the abyss. Capital controls could be used to prevent this disaster, but only up to a point. If the ECB immediately cuts off Greek banks from all borrowing, these banks would need to pay back the Greek central bank a lot of euros, euros which they don't have, no matter what capital controls are imposed. Capital controls can only change flows, they can't change existing stocks of borrowing.
- If the ECB does cut off Greek banks, and the banks are headed towards bankruptcy, this is the point at which Grexit becomes more likely. If Greece leaves the euro, the Greek central bank can lend money to the banks unencumbered by the ECB's permission. But Grexit will be messy. I have no idea what it would look like. I don't think anybody does.
People who know the euro area far better than I assure me that Greece will not leave the euro. It's in nobody's interest, I'm told. That may be true. I worry, however, that there is plenty of scope for a mistake. Between sorting out the final €7.2 billion, and the third bailout package afterward, and whatever deals are needed after that, there are many junctures where tired negotiators will have the opportunity to slip up.
Photo courtesy of Flickr user GUE/NGL.