It’s about savings accounts, not Euro zone membership.

The Greek debt drama is now front and center of media attention. I summarize this complex dance by asserting:

  • Greece owes more money than it can pay. It wants some of its debt forgiven.
  • Greece is mired in bureaucracy: Government jobs are too numerous (too many people get paid to do too little). Government regulations stifle competition and impede progress. Tax collections are terrible. Pension plans are too generous.
  • I believe that Greek people are for the most part innocent bystanders, operating in a system beyond their influence (and in many respects probably beyond their general awareness).

A big part of Greece’s conundrum derives from its banking system. It’s important to understand how a bank works. Simplistically, banks take money (from depositors) and use that money to make loans. If all depositors ask for their money back at once, it’s a problem. The money’s not there (this is a run on the bank). Banks must sell their loans to other banks willing to hold them. However they can’t get full value in a forced sale scenario such as this. The amount they get is likely to be less than the amount they need to pay depositors. The bank is then determined to be insolvent (bankrupt). Typically a regulator (the government) steps in and takes over the bank. The regulator executes an orderly sale of the loans and insures the depositors get their money.

If multiple banks experience a bank run, and if the government is also strapped for cash, this is a problem. One real possibility is that depositors are told, “sorry, you’re money is gone.”

Over the past several weeks, there has been a mild run on Greek banks, with depositors emptying out their savings accounts. Banks have been ok because the ECB (European Central Bank) has effectively lent money to the local Greek banks, thereby providing cash to give to the depositors (again, this is a simplified picture). Over the weekend, the ECB announced they are not expanding the amount they are willing to loan Greek banks. If Greek citizens get worried and demand their money back, an all-out run on the bank would ensue.

To try to avoid this, Greece has literally closed its banks this week. People cannot go to the bank to ask for their money back. The banks are therefore safe . . . for a week.

In this tough situation, the left wing Greek government (Syriza, led by Alexis Tsipras) has tried to get Greek loans to be forgiven. Tsipras didn’t get enough. So he walked away from talks. Now, with Greece being bankrupt, he’s at a crossroads. Tsipras can steer Greece to default on its loans. Or he can steer Greece to accept tough terms to cut some of the bloated government spending that plagues the country (while this latter choice seems reasonable, there are real people getting pensions and salaries, and cutting spending hurts those people, regardless of whether it’s good in the long run). Tsipras has called for a referendum to be held July 5. He is asking the Greek people to decide. Of note, he has taken the public stance of advocating people vote “No” to austerity (effectively advocating default and possibly exit from the Euro zone).

I believe that for all the noise, the Greek majority will vote “Yes” – accept austerity.” I think people will see the issue differently from the question of austerity or Euro zone membership. I think voters will focus on their personal finances and their individual bank accounts.

Banks are now closed. A vote of “No – reject austerity” likely means bank accounts could be wiped out and a person’s savings could be permanently lost (the ECB could ask for their money back, and banks would need to seize depositors’ savings accounts to pay this). A vote of “Yes – accept austerity” is murky, but it allows for the probability of being able to access one’s savings. I believe that people will vote in such a way that does not destroy their savings.

Whatever happens, this will not be the last of the issue. It will play out for years across multiple countries. We have not heard the last from Greece regardless of the outcome.

Sources: Explaining the Greek Debt Crisis and What It Means for the Eurozone (The New York Times); The Banking System:Commercial Banking– How Banks Make Money (Investopedia); Bank Run (Wikipedia); Greek debt crisis: Banks to stay shut, capital controls imposed (BBC); How Alexis Tsipras’ Greek Referendum Call Came After Creditors Covered His Proposals in Red Ink (The Wall Street Journal); Greece in shock as banks shut after snap referendum call (Yahoo Finance)

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