There has been much interest in the European Central Bank making a new call on Greek government bonds, saying that 'it is currently not possible to assume' the bonds to be safe assets once the bailout programme expires. This is as you might expect: after all Yanis Varoufakis, the new Greek Finance Minister, has been touring European capitals this week to remind creditors that Greece is bankrupt. Yet markets and Twitter – our two modern messengers of truth – 'spooked', along, of course, with the poor souls who thought Greece’s Attica or Piraeus banks to be worthy an embrace by their savings. Loans to the Greek government fetch a 9.7 per cent rate of interest - in comparison to German, British, and even French levels of less than 2 per cent.
Ever since the creation of the first bailout to Greece, it has been an insult to junk bonds to put them in the company of Greek government bonds. Greece’s debt is not sustainable and the expectation of a magical economic turnaround, like in the Baltics after the 2008 crisis, has been delusional. The only reason the ECB accepted Greek government bonds as decent collateral in the first place is because the gnomes of Frankfurt were forced into that delusion. Yet now, with Greece’s government saying there shouldn’t be an extension of the bailout programme when it expires at the end of February, it would be impossible for the ECB to be inactive.
The ECB in Frankfurt has not made a political call. Nor has it pulled the plug on Greece’s banks. Even if it no longer can accept Greek government bonds as collateral, the Greek central bank can provide funding to domestic banks. And that is also what happened yesterday; the ECB approved new so-called emergency lending assistance by the Bank of Greece to banks that can’t fully fund themselves. In practice it means the ECB is taking measures to protect its own balance sheet from a Greek default.
The ECB is neither the problem nor the solution for Greece. The problem Greece now faces is its new government in Athens. It’s got one thing right, which is that Greece’s debt should be written off in part. But Alexis Tsipras and his Finance Minister – the preening intellectual flâneur who the German press likens to Lord Voldemort – are on a collision course with their Eurozone colleagues. Their economic diplomacy is for the junior league. And the plan to rush the Eurozone to a new deal with Greece before the country runs out of money is met with scorn. Other governments rather think Tsipras and Varoufakis could stew in their own juice for a while.
Make no mistake: this is going to end badly. By this time next year, either Greece will be out of the euro – or Syriza will be out of power.