Can Greece do a ‘Münchhausen’ and pull itself out of the monetary mire?
A Cyprus style money destruction ‘solution’ for Greece is still in the cards – and I’m afraid that the continued monetary inaction of the ECB brings it closer. One might cry ‘moral hazard’ about guaranteed ‘Emergency Liduidity Assitance’ (ELA, or QE which actually works) from the ‘Eurosystem’ to the Greek banks but on this blog we did warn about the dire consequences of ECB inaction in 2011 and 2012. And we were right: these consequences – increasing deflation and crisis, higher debts compared with income – materialized and the ECB has to face its responsibilities for its inaction. Mind that, at this moment, Greece has a surplus on the current account and a primary government while it leads the other austerity countries by a lap when it comes to cutting wages, employment and entitlements and reforming the labour market. It did do its austerity homework (which is of course why its economy is in tatters). Be that as it may: until the ECB comes to its economic senses the already gasping Greek economy is increasingly smothered. And Greece will have to do a ‘Münchhausen’ to pull itself out of the monetary mire. Which is not entirely impossible, though the banks won’t like it. See graph 1.
A relatively quick short- as well as long-term fix is to increase the ‘moneyness’ and liquidity of ‘receivables’. Irish companies managed, compared with Spanish companies, to mitigate the Irish liquidity crunch by increasing the amount of receivables on their balance sheets (remember, interest rates are very low, which helps). In the end these debts have to be paid but a monetary easing of 70% of GDP, as in the Irish case, would not be bad, in Greece. The Greek government can increase the moneyness of ‘receivables’ by moving them up in the bankruptcy pecking order (they will have to get preferential treatment compared with bank debts), by enabling companies to use them (with a ‘haircut’) to pay tax arrears, by using smart technology and algorithms to enable ‘clearing’ (a matching problem). This increase of moneyness will also increase the asset value of receivables, which will make Greek companies more willing to keep them on their balance sheets.In the end, Euro’s will still be needed, but that’s why ELA was invented.