If the deposit flight continues unabated, the ECB will be in an awkward position, because it will likely be called upon to provide capital to Greek banks to make up for lost deposits. Presumably the ECB would do so only with a mandate from euro area political leaders, perhaps including explicit euro area sovereign guarantees to continue to lend to Greek banks or allow Bank of Greece Emergency Liquidity Assistance (ELA) to continue. Such a demand would echo what the central bank did when it was forced to accept default-rated Greek bonds after the restructuring in March. As Belgian central bank president Luc Coene said this week: “The issue is one for the politicians…. It will be a political issue—where is the balance of solidarity—rather than a technical issue about whether the banks have been sufficiently recapitalized or not.” The ECB would of course not want to be seen as pushing Greece, leaving that role to elected politicians.
Euro area leaders would then have to decide what to do. They would probably not want to see the Greek banking system collapse immediately, so they would likely go along with the ECB lending money to Greek banks. But they would probably also demand that Greek politicians sign up to the IMF program, or even that they scrap the elections and form a unity or technocratic government. This may seem terribly undemocratic. Such demands would have to be packaged to make them look like the idea came from Greece. But such things have happened before. Only last November, the EU pushed for the installation of technocrats to run the governments of Greece and Italy. Despite the claim by Merkel and Hollande that they would “listen to the Greek people,” Greek bank depositors may speak louder than Greek voters. If a bank run presented an opportunity to win a Greek agreement to stick with the IMF program, European leaders would almost certainly seize it.
More broadly, a devastating domestic bank run in Greece could strengthen the case for keeping the euro area together while it heads toward a fiscal and banking union. Euro area leaders in Germany, France, and elsewhere know that a euro exit by a member state would be very costly throughout the currency region, making them vulnerable to blackmail from opportunistic populists like Alexis Tsipras in Greece. But now the example of Greece has illustrated a new factor—namely, that the threat of a bank run taking place in any country considering a euro exit acts like the functional equivalent of a preemptive nuclear strike on political forces advocating such an exit. Because of the Greek example, populists across the euro area have awakened to a new political reality—that will be blamed for destructive domestic bank run if they pursue their exit strategies.
By bringing forward the economic costs of a euro area exit to the present—before any voters back a euro exit in their country—a bank run in Greece will not only help produce the “right result” in that country (i.e., a pro-IMF program majority), but prevent such policies from even being articulated by populist leaders elsewhere. Such political neutralization of populism would be a huge prize for euro area leaders.
Utilizing the threat of bank runs does take euro area brinkmanship to a dangerous new level. Euro area leaders should think carefully about proceeding down this road. It should only be contemplated if euro area leaders are willing to proceed to pan-euro area bank deposit insurance and other dramatic integration measures to avoid the spread of contagion and bank runs to other member states. If they are prepared to do so, they can call Alexis Tsipras’ bluff by fomenting a bank run in Greece before the new elections are held.
Originally Posted by Ulenspiegel
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