This article by Dimitris Kontogiannis addresses the problem of the continuing drain of deposits in Greek banks. Mr. Kontogiannis suggests that raising interest rates will increase bank deposits and, as an indirect consequence, reduce the current account deficit because of less consumption. My reaction? Good luck!
What we have seen in the last 2-3 years is a complete confidence crisis regarding Greece. Foreigners lost confidence in Greece and withdrew their financing, and Greeks themselves lost confidence in their banking system and in the government’s policy to adhere to the Euro. Should Greece exit the Euro, depositors would lose much of their wealth. Should a Greek bank go bankrupt, depositors would probably lose all of it.
Such a crisis of confidence cannot be overcome with higher interest rates. At the same time, the drain of funding for banks must be brought to a halt. If not, the ECB will become the exclusive funder of the Greek banking system at the end of the day. Learning from other countries in similar situations, the only alternative is to temporarily freeze bank deposits.
Freezing bank deposits is nothing other than to force a situation which would normally happen naturally, i. e. that deposits stay in banks. The deposits retain full value and they continue to receive interest. They just can’t be withdrawn for a limited period of time.
The current account deficit benefits only temporarily from less spending. As soon as spending goes up again, so will the current account deficit. Why? Because it is a structural one. Greeks buy abroad because these products are not available domestically or, if they are, they are much more expensive. This is why Greece is overspending so much, a trend whichmust be brought to a halt, too.
The current account deficit is improved by radically curtailing imports through domestic import substitution wherever possible. If the latter needs some start-help, special taxes on imports can be implemented.
Finally, Greece must start an export drive. A national consensus must be developed that imports hurt the country and exports help it. The import lobby needs to be weakened and the export lobby strengthened.
I hardly doubt that freezing the bank accounts will fix something. It will create panic and then, after the temporary period will be over, probably most of the deposits will be withdrawn (and possibly some banks gone bankrupt).
ReplyDeleteAnd probably, technically speaking, the people will find different ways to get the money back. After all, there is their money and it's far from fair to block it (even temporary).
Otherwise I totally agree with the rest of the article. Very nice blog, keep up the good work!
I have experienced a deposit freeze in Argentina back in the 1980s. Yes, it creates panic. At the same time, it brings home to EVERYONE that there is a big crisis. My feeling is that the lower third in Greece is hurting enormously while at the same time the upper third is not feeling much of the crisis. Being a Free Marketer, I am no friend of such actions but when you are losing deposits at a rate of over 30 BEUR a year, you have to start considering some unorthodox measures. Unorthodox measures per se won’t accomplish anything. If, however, they are put into the context of a plan which shows light at the end of the tunnel, people generally go along (politicians perhaps not…).
DeleteMind you, the Greek banking system has, since the beginning of the crisis, lost much more by way of deposits than the net amount of the rescue loans which the government received after loans and interest were paid!
One might argue that it doesn’t really matter as long as the ECB replaces the funding. That’s true. But there is such a thing as a “maximum debt capacity”. A couple of years ago, I would have guessed that the ECBs maximum debt capacity for the Greek banking sector would at best be about 50 BEUR. Actually, they now have well over 100 BEUR out to the Greek banking sector. So no one knows beforehand where that maximum debt capacity is but once it is reached, everyone finds out brutally.
My point is that if you have a maximum debt capacity, you should use it for the best purposes. Funding wealthy Greeks who transfer their money offshore is not a good purpose, in my opinion. Perhaps the link below is of interest to you. And, by the way, thanks for your compliment!
http://klauskastner.blogspot.com/2012/01/four-eu-freedoms-two-too-many-for.html