The Bank of Greece submitted a required report on monetary policy to the Greek Parliament and the Cabinet this morning (hat tip Swedish Lex). The English language version of the press release shows that it says, in stark terms, that failure to reach a pact with Greece’s creditors will lead to a Grexit and likely a departure from the European Union. Here is the key section:
As the Bank of Greece had assessed in its Governor’s Report for the year 2014, the conclusion of a new agreement with our partners is of the utmost importance to fend off the immediate risks to the economy, reduce uncertainty and ensure a sustainable growth outlook for Greece.
Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.
All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.
This is why the Bank of Greece firmly believes that striking an agreement with our partners is a historical imperative that we cannot afford to ignore.
It does at least call for “milder fiscal consolidation” meaning less draconian fiscal surplus targets, but also puts in a firm word in favor of the structural reforms:
…ensuring fiscal discipline and the achievement of primary surpluses through interventions of a more structural nature rather than merely through revenue-raising measures. Emphasis should be placed on ensuring the viability of social security funds by eliminating the numerous exemptions from the general provisions. The various exemptions from direct and indirect taxes also need to be reviewed and should only remain in place if warranted by growth-enhancing and social considerations
As Nathan Tankus pointed out in his posts on the operational issues of a Grexit, the Bank of Greece is not under Greek government control but is effectively a node of the European Central Bank. And as we pointed out early in the power struggle between Greece and its creditors, the ECB was stoking the bank run as a means of applying pressure to the Greek government. We quoted former IMF staffer Peter Doyle in February:
…in an incredible reversal of practice during the global financial crisis—when central banks were at pains to conceal which institutions were receiving their emergency assistance for fear of compounding the adverse signals and therefore the crisis—the ECB has brazenly publicized exactly which Greek banks depend on its help and how much. And it has overtly warned it would withdraw that help. In this way, the central bank is overtly threatening to blow up the Greek banking system, in order to make the euro work. Walter Bagehot, the nineteenth-century father of lenders of last resorts, would be dumbfounded.
We’ve also pointed out the potential for the ECB to make same sort of “offer you can’t refuse” that it made to bring Ireland and Cyprus to heel: that bank support in the form of the ELA would be withdrawn (leading to a collapse of the banking system, and in Greece’s case, a disorderly Grexit of capital controls, nationalization of banks, and issuance of drachma to fill the banks’ balance sheet hole) unles the government took specific actions set forth by the ECB. Given the much greater size and visibility of the Greek crisis, we don’t expect the ECB to engage in this type of thuggery unless (or perhaps more accurately, until) it has plenty of political cover.
Nevertheless, this report looks to be an effort to pour gas on the ongoing fire of the bank run, particularly since Greek citizens are souring on the Syriza negotiating strategy. From a Bloomberg story last week:
Actually, most Greeks may be ready for Tsipras to bow to the creditors’ demands, according to a Marc poll of 1,001 people conducted this week for Alpha TV. In the survey, 50.2 percent of respondents said Greece should accept the creditors’ plan compared with 37.4 percent who said the prime minister should stand firm.
Not surprisingly, sources in Greece, like this freelance journalist, say that people are edgy:
— Omaira Gill (@OmairaGill) June 17, 2015
The ECB governing council is meeting today. They are certain to approve an increase in the ELA. The meeting is an opportunity to make formal comments on the negotiating impasse, but the ECB may have decided that its local proxy was the better course for increasing pressure on the Greek government.