Wednesday, March 4, 2015

Five Steps to Fixing Greece’s Debt Problem

by Frank Hollenbeck

Mises Daily

March 4, 2015

The ECB decision to limit liquidity to Greek banks was another nail in the euro-coffin, and rumors of a “Grexit” caused bank withdrawals to accelerate. Over 25 billion euros have been withdrawn from Greek banks since the end of November 2014. But there’s a problem. Fractional-reserve Greek banks do not have the funds to cover all the withdrawals if trends continue. Current non-performing bank loans in Greece are close to 40 percent and banks hold large amounts of high risk Greek government debt.

Despite rumors in the press, there are no European mechanisms to force Greece out of the eurozone. Greece would have to be the one to decide to leave. So for now, Europe will continue to pretend it will be paid back, and Greece will continue to pretend it is implementing significant structural reforms.

Current conventional wisdom is that a bank run would force Greece to return to the drachma. Although this is a possibility, it is not a foregone conclusion. Even if Greece defaulted, it would still probably have a large euro-based debt.

So what can Greece do?


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