Tag Archives: euro exit

For Greece, ECB = End Close, Beware

The European Central Bank’s decision on Friday to stop accepting Greek government bonds as collateral was not the first such move made by Frankfurt but there was something distinctly ominous about the timing and implications of its choice.

“The ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment program,” the central bank said.

The ECB has twice before this year refused Greek banks the ability to use government bonds to draw much-needed liquidity. The first was after the bond restructuring, or PSI, and the other was before the start of the bank recapitalization process. In both cases, Greek banks were excluded and had to rely on Emergency Liquidity Assistance (ELA) to gain access to funds. They have reportedly drawn more than 60 billion euros this way.

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An imperfect balance

A lot of time has been devoted to words over the past few days in Athens and other European capitals. Perhaps spending some time considering a few numbers might prevent Greece and its European partners soon having nothing left to say to each other.

Even the most faithful party apparatchik, blinded by an unexpected electoral victory or crushing defeat on May 6 could not fail to see that Greece faces the most urgent of economic problems. Figures released on Tuesday morning revealed that the Greek economy had contracted by 6.2 percent of GDP in the first quarter of 2012 compared to a year earlier. Many economists believe the economy will shrink by about 7 percent of GDP this year unlike the troika’s forecast for a contraction of under 5 percent.

The continuing deep recession is making any effort to boost public revenues a hopeless task. With revenues struggling, the weight is falling on public spending but Greece’s decision makers and its public administration have been unable to find smart and effective cuts to make. The public investment program, for instance, has been chopped to bits as a last resort, leaving almost nothing standing. The result is that Greece is still spending more than it can earn. Statistics published last week put the primary deficit (which does not include interest payments) for the first four months of the year at 1.68 billion euros. This is a significant improvement on last year when it stood at 3.56 billion euros during the same period but it still means that Greece is due to spend at least 5 billion euros more than it will raise in revenues this year.

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