De fault of De Bankers?

[ceemage]

OK, this is something that I've been meaning to ask for a a while. But, since it seems to be becoming potentially critical at the moment, I guess now's the time.

There seems to be an implicit assumption in all the discussion around the Euro crisis, for at least the last 18 months or so, that if Greece defaults on its debt, then it must, at that same point, leave the Euro.

To which my immediate response is: Why?

I like to think I'm reasonably clued up on such things. I even have half an Economics 'A' level, after all. (Yes, half. That's a story for another day.) But I can't see any technical or logical reason why "A, therefore B." Where A is a Greek government debt default, and B is the currency of Greece having to shift to the New Drachma, or whatever.

Euro notes are, of themselves, government bonds of a sort, of course, as is any national currency. An odd sort of government bond to be sure, with no fixed redemption date and a 0% coupon, but a bond nevertheless. A limited company could, in theory, default on its class B debentures, but still keep paying the class As. (This could have all sorts of generally negative consequences, but different classes of debt are, when all's said and done, different classes of debt.) Likewise, a nation state could say, "You know those x% 5 year gilts with a repayment date of next week? Afraid it ain't gonna happen. But, you can still bring your five pounds notes in to the national bank and we'll give you five shiny pound coins for 'em." For the Euro, this is even more the case, in that the currency is no longer exclusively national in any case.

So, why would a default on Greek government debt imply that Greece would have to leave the Euro?

Comments

[drplokta]

If Greece defaults, it can no longer borrow money from anyone, and it can't print new Euro. And it still has a primary deficit, meaning that it's spending more money than it's getting in from taxes, even without debt repayments. And if it defaults then its own banks go bust and need to be bailed out. But it physically won't have the money to meet its spending commitments, let alone bailing out its banks, and it will have no way to get any, unless it switches to a currency that it can print.

[ceemage.livejournal.com]

The "needing a currency you can print in order to keep funding the deficit" argument makes sense. But, given that the Bank of Greece is one of the Euro-printing banks, presumably it's 'just' a treaty obligation that means they can't print more than their allocation? I guess it all depends how desperate they get, and how big a blind eye the rest of the Eurozone is prepared to turn (if any).

The phrase 'just a treaty obligation' of course brings to mind de Gaulle's observation about roses & young girls...

[wwhyte.livejournal.com]

The Bank of Greece doesn't issue Euro, I think, the ECB is the only bank that can do that. (Wikipedia: the ECB "has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand").

[ceemage.livejournal.com]

My understanding was that the ECB *authorised* the issue of Euro notes, but that it was the national banks who actually rolled the presses & produced them. That said, I have no idea what checks & balances there are to ensure a national bank doesn't go over its allocation. But really this is the nuclear option for Greece — to (in effect) blatantly ignore its treaty obligations but try to stay in the Euro by daring the ECB to do anything about it.