Now the Greek sideshow has passed

The sideshow appears to be over for a bit. Greece has elected a coalition of parties that support continued austerity (as required by the terms of its bailout) and thereby reduced the immediate risk of a disorderly exit from the euro.


But this still leaves the Euro area stuck in the middle of an unsustainable situation. First there will be the lingering Greek “election hangover” – that massive outflow of deposits from Greek and Spanish banks, which is rumoured to have occurred in the run up to the election, is not likely to be easily reversed.  Why would Mrs Demetriou want to bring her money back to Greece having taken all that time to travel to Cyprus, Basel, or Berlin to open up an account and deposit her money there?


That means that the ECB, which likely topped up the Greek and Spanish banks last week via the ECB Target 2 system, will have an ongoing exposure to these economies until the Greek and Spanish banks can whittle down their loan portfolios to match the loss of deposits. The implication is that there will be less funding for investment and growth in Greece and Spain and those businesses that are currently using bank finance to keep afloat won’t be able to finance their wages bills and will have to shut shop.


In addition, Spain’s 100 billion euro bailout seems to have done nothing. Spanish government bond yields have just kept on rising. Either markets are betting on being able to push Spain to the point where more money — perhaps from the IMF — is thrown in to save bank shareholders, or they recognise that simply lending more money to the Spanish government won’t get it out of its debt crisis. Either way, the situation looks increasingly troublesome. And it doesn’t stop there.  Ireland will likely need another bailout since the existing one has failed to prevent its banks from further losses that the government of Ireland will be struggling to cover. Unfortunately, these problems don’t stop at national borders.


So while there is some breathing room, the pressure is on the next Euro summit (28-29 of June, after this week’s G20 summit) for something concrete.  Let’s hope they have more in mind than laying the ground work for a banking union that will take 10 years to implement.

2 thoughts on “Now the Greek sideshow has passed

  1. Torrens,

    I share your concerns. It is not clear to me, based on comments made by senior EU officials in Los Cabos, that they appreciate the fact that time may be running out for them. The Greek elections bought them breathing space. But just that. They did nothing to dispell the uncertainty that hangs over Europe and creates incentives for individuals to protect themselves from potential “corner solutions” such as the introduction of capital controls. They have an unenviable challenge: to construct the insitutions necessary to support monetary union. But this can’t be done overnight. If they don’t find some way of restoring confidence and taking the bank run equilibrium off the table, their efforts to build these institutions will come too late.

  2. Ricardo,
    Good to hear from you Ricardo. Yep, the saga continues. I suspect that the EU authorities thought they had done everything right. They put a big number out there for Spain; they didn’t ask the Fund for money to do so; and they gambled (and won) that the New Democratic Party would win in Greece. At the same time they started to lay out their vision for the long-term. All the toy soldiers seemed to be lined up. Oh well, if only it was a game of soldiers.

    Am looking forward to seeing what will come of the summit. Perhaps the Spanish situation will focus their mind before it forces their hand.

    Am still working on a post on the Euro — decided to trying and think about what Hayek would suggest.

    Have fun wherever you are.

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