12 Feb 2012

The Greek Tragedy - Interest rates at 25.91%

The latest figures for Long-term interest rates for EU member states came out on the 10th of February. The rates imposed on the Greeks went up from from 21.14% in December 2011, to a totally ridiculous 25.91% in January 2012. In France, lending money at rates of over 20.65% is illegal. Why are the loan sharks in the bond markets allowed to get away with it?

The fact that the Greeks are being forced to accept yet another round of massive austerity because they have to find another €14.5 billion to pay these obscene interest charges to a bunch of ruthless loan sharks is beyond belief.

I find the situation even more nauseating because I know that there is a perfectly valid solution. Why don't the people responsible for this catastrophe read my blog??

With apologies for the repetition, here is the solution, yet again.

When Mario Draghi printed 489 billion euros on the 21 december 2011 and handed it to 523 banks with no strings attached, the banks didn't have a clue what to do with all their extra cash. They immediately parked virtually all of the money back with the ECB, who only pay 0.25% interest on it. Apparently, even the prospect of getting a return of 25.91% lending to the Greeks was not sufficiently attractive for them.

It is clear that the ECBs strategy of handing unlimited amounts of money to commercial banks and praying that they might just do something intelligent with the money will simply not work.

However, and contrary to popular belief, the European Central Bank is not forced to go via commercial banks.  Paragraph 2 of article 123 of the Lisbon Treaty allows Central banks (including the ECB, but also the Bank of England) to lend to "publicly-owned credit institutions". I've checked with the ECB directly, and have been told categorically that such institutions are free to do whatever they like with ECB money - including lending it on to governments.

As a result, at the the second ECB money printing bonanza that Mario Draghi has planned for the 29th of February, any publicly-owned credit institution in Europe would be free to borrow 340 billion euros from the ECB (substantially less than the 489 billion printed on the 21st December) and lend it to the Greek government, who could then pay off the entire national debt.

The Greeks would no longer be paying 25.91% on their debt - they would just pay the 1% charged by the ECB when it lends to banks, plus maybe a bit more if the publicly owned credit insitution who was the intermediary decided they wanted to make something out of the deal (I'm not sufficiently naive to think that there is anyone out there who would do this simply because it is a good idea and in the public interest).

Importantly, the debt exposure of the various banks and governments who have lent money to the Greeks would immediately disappear. As I showed earlier, France would be able to write off €56.7 billion of exposure, Germany would write off €33.9 billion, and the UK €14.6 billion.

It's also imporant to realize that since much of the "money" lent to the Greek government didn't actually exist when it was lent (read about Fractional Reseve Banking if you don't know why), paying off the debt will just cause the "money" to disappear in a puff of smoke. Unlike the Quantitative Easing so loved by Mario Draghi and the Bank of England, paying off debt this way does not lead to inflation. It seems amazing to me that the Germans, who have been blocking any possibility that the ECB could directly help governments, are apparently perfectly happy for the ECB to print unlimited amounts of money if that money is handed to banks. By the way, it is clear that the Bank of England's recent decision to pump another £50 billion of quantitative easing into the banking sector is total lunacy... but that's another story.

The last point is that some would say that the Greeks would not be able to pay off the 340 billion they owe. Rubbish. Greek global debt per capita is actually way lower that many European Countries - and in fact less than Germany. And as I have suggested, it would be the perfect place to introduce a variable rate FTT that would be automatically adjusted to generate the 35 billion a year that would be needed to pay off the ECB loan over say 10 years. Given that visible transactions in Greece were about 12.5 trillion euros in 2010, I estimate that a universal FTT of just 0.3% would do the trick. And, unlike conventional taxes like VAT, income tax and taxes on company profits which are clearly very inefficient in Greece because of the existence of a long tradition of systemic tax evasion, the FTT based mechanism would be virtually impossible to avoid, and above all fair.

Well, there you have it. There is a solution. Why on earth is nobody proposing anything except massive and completely futile austerity? It beats me.

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