Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods, No One Wants To Get Blamed For Kicking Greece Out

A lot of politicians in Germany, but also in other countries, issue zingers about a Greek exit from the Eurozone and the end of their patience. Yet those with decision-making power play for time. They want someone else to do the job. Suddenly Greece is out of money again. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed.

So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers….

The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices.

It’s easy to blame the Troika, and it can take the heat. History searches for the person who is responsible. But the Troika doesn’t have one. It was designed that way: a combo of multi-layered, undemocratic structures. And the Troika inspectors, though despised in Greece, are career technocrats, not decision makers.

So Chancellor Angela Merkel became a substitute. Greek tabloids treated her like a Nazi heir, with Hitler mustache and all. But she’s not the decision maker in the Troika, though she is a contributor. And she—though still unwilling to water down the bailout memorandum—consistently stated that Greece should remain in the Eurozone. She doesn’t want to be blamed.

In early July, the inspectors returned to Athens to chat with the new coalition government and check on progress in implementing the agreed-upon structural reforms. Soon it seeped out that their report would paint an “awful picture.”

In late July, the inspectors returned to Athens yet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. A big faceless document on which people of different nationalities labored for months; a lot of politicians can hide behind it. Even Merkel. And the Bundestag, which gets to have a say each time the EFSF disburses bailout funds.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks. And on Tuesday, Greece “sold” the first batch, €812.5 million of 6-month T-bills with a yield of 4.68%. Hallelujah.

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  7 comments for “Greece Prints Euros To Stay Afloat, The ECB Approves, The Bundesbank Nods, No One Wants To Get Blamed For Kicking Greece Out

  1. SomeAnon says:

    ..where's the source for this story? Where did you learn the news that Greece would be allowed to print?

  2. ckappa says:

    You write about the politicians' pre-election promises: "…rehire laid-off workers…" Now I am the last person in the world to even come remotely close to vouching for the 'honesty' and 'credibility' of Greek politicians! They are arguably the worst scum of all their counterpart-creatures we call 'politicians' in the world. But you are possibly the first commentator on the issue to force me, with disgust, to actually, brrrrr, do it! No Greek politician said they would re-hire any public servants. Even the 'demonic', 'left satanist', Tsipras did not go that far!! There still is a thing called fact checking I believe…But, hey, what is it they say? Don't let a few facts wreck a 'good' story…

  3. paciscor says:

    Hasn't ELA already been used by Ireland last year or even 2010? I seem to recall some 30 billino € printed the same way.
    Anyway there is a difference between printing this way and driving printing machines red-hot like Berniecopter does.

  4. Wolf Richter says:

    Thanks for your questions and observations.

    paciscor – to clarify, the ELA is used to provide emergency funding for banks, not governments.

    SomeAnon – The treaties that govern the ECB, the Eurosystem of central banks, and the management of the euro itself prohibit central bank funding of government deficits and debts ("monetization of debt"). That is THE reason why there is a “debt crisis” in the Eurozone.

    No such restrictions on central banks exist in the UK, the US, Japan, or anywhere else. Japan’s debt to GDP ratio will be around 230% by the end of this fiscal year (March, 2013). Greece’s ratio is “only” 160%. But Greece cannot print its way out of trouble (well, until now), unlike the US and Japan. Hence its default earlier this year, and hence its current troubles.

    The ECB is THE powerful central bank of the Eurozone; the national central banks are essentially emasculated branches of the ECB. The operation in Greece is the first such effort in the Eurozone. Its indirect nature is used as a very small and thin fig leaf by the ECB and that the Bundesbank. In reality, the treaties have been violated.

    However, the ECB has been trying to “print” by buying sovereign bonds in the secondary markets (and did so to the tune of €211 billion), but the Bundesbank has been opposed to it, based on its reading of the treaties. In March, the process was stopped.

    This is a battle we will be watching closely.

  5. Janeb says:

    The EU should not fund govts! Who cares??? just do it and damn the legalities. Just like the US money laundering farce. US buying its own debt via the banks! What a sad farce.

  6. Since the Bundesbank is slowly losing the war on fiscal monetization, the ECB's emerging consensus would seem to be that the ECB should start acting as the eurozone's lender of last resort. This would certainly be good news if true. Greece as a country is a joke, but a Greek default would not be. Better to bail it out under the cover of "strict conditionality" which will be completely ignored. The alternative is that theBundesbank throws down the gauntlet, publicly opposes Greece, and gets outvoted. Not sure Weidmann wants to do that yet.

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