While the punters speculate on the outcome of the Greek election on 17 June, in truth ‘Grexit’ has already happened. Because of massive withdrawals from the Greek banking system, the country is on emergency life support from the ECB. First, following the inconclusive May elections, the ‘troika’ decided that it would postpone the €48bn recapitalisation payment until after the June election. Then, a fortnight ago, the ECB stopped accepting collateral from the Central Bank of Greece (BoG). This collateral is needed for weekly refinance operations required to keep the country’s private banks liquid.
In consequence, the central bank has had to seek €100bn from the ECB’s Emergency Liquidity Assistance (ELA). The difference between money received through the ‘normal’ ECB refinancing channel and the ELA is that, in the former case, the loan from the BoG to the private Greek banks is guaranteed by all ECB members while in the latter case it is guaranteed by the Greek state. In the words of one commentator, ‘think of what this means about keeping your money in your local bank?’
Some think that Greece’s departure may be a good thing. The argument is familiar enough: Merkel and her allies want Greece out ‘pour encourager les autres’. Greece will benefit from leaving now rather than later. With Greece gone, a deal can be done with Hollande over Eurobonds. Ultimately, the anti-austerity camp will win.
But as Martin Wolf and others have noted, Greece’s disorderly departure will in all likelihood shatter faith in the Eurozone forever. A major bank run will almost certainly trigger a flight from the single currency. We shall not return to the comfortable prosperity of post-war Europe soon or even later—in all probability, that world has now died.