Panic buttons

Financial panic has a huge role to play in deciding the fate of Greece. How do we disentangle real from inflated fear?

largeThere’s a high-stakes game of chicken being played in the run-up to the Greek elections. This is certainly an unstable time for the markets, but how much of the financial panic is being stirred up by those with vested interests in  the chaos? Fingers are being pointed at the government, New Democracy; meanwhile the banking sector in Greece wants to avoid the turmoil that is certain to come if Syriza takes power, due to its plan to renegotiate the country’s debt. Added to this dynamic is the spin of the government-aligned media. There is no such thing, in other words, as neutrality. So how are we to know what’s going on?

The bank run

There are reports that more than 3 billion euros in deposits were withdrawn from the Greek banking system in December. This has been framed by some in the mainstream media as a response to the political insecurity of elections, and anticipated chaos if Syriza is to take power and try for a New European Deal for Greece. Yet what does the withdrawing deposits really signify? Other commentators have suggested that this is simply a trend of the season (people spend their savings over the Christmas period) and a positive sign that the public are responding to the slight but significant uptick recently in the Greek economy. December is also the month Greeks pay their annual taxes, contributing to even higher spending around the holidays.

The picture is not simple. Some savers are no doubt moving their money abroad. The combination of political turmoil and Syriza’s pledge to clamp down on corruption, tax evasion, and to raise taxes on the rich, is bound to cause some flight. But this doesn’t approach the scale of the bank run before the last general elections in 2012. It is hard to determine the facts behind the total money withdrawn, and the 3 billion headline is being used by the government in their attempts to frighten voters.

Of course, fear fuels fear – this is how bank runs snowball out of control. Advising savers to take their money out of Greek banks, as several international publications have done, is just the natural conclusion of scare-mongering by the government itself. It’s the sign of a desperate Prime Minister: Samaras has little to lose in feeding financial panic with elections looming that promise to oust him from power.

The liquidity crisis

Late last week, four Greek banks engaged in what has also-been called a ‘bank run’ by some publications. This means they have sought emergency funds from the European Central Bank (ECB), through Greece’s central bank. Again this has been framed as part of the chaos in the run-up to the possible victory of an anti-austerity, anti-memorandum party.

There is a wider backdrop: the ECB’s plans to launch the biggest stimulus package for Euro countries thus far – a major programme of quantitative easing. As Paul Mason sets out in more detail here, it’s a programme that – in practice – may exclude Greece. Instead of sharing the risk across the Eurozone, national central banks may have to assume their own risk, which effectively sidelines Greece.

Greek banks would be asking for assistance regardless of the election result. The country worst hit by Europe’s austerity policies, may be the one frozen out of the latest ‘rescue’ package. The probability of a Syriza win and a renegotiating of the debt is complicating and adding to the liquidity crisis, but it is not the factor ‘causing’ a ‘precautionary bank-run’.

Grexit

The most obvious cause of panic is over the possibility of Greece exiting the euro. As set out in our previous blog, ‘Is Syriza still a coalition?‘ there is some confusion around the party’s policy on this, caused by media running with the personal positions of leading figures in Syriza, rather than the party line. The party wishes to remain in the Euro, but wants to negotiate a writing down of the country’s public debt by at least 50%, and a moratorium on servicing what remains. The details on the context for negotiation are set out in their Thessaloniki Programme.

Angela Merkel was quick to stamp out claims last week that the German government was preparing for a Greek exit. It seems clear now that she will at least sit down at the negotiation table with Tsipras. Of course, if negotiations fail, Greece under Syriza could still be pushed out of the Euro. The risk is very real, yet assertions of an immediate ‘Grexit’ – a major Greek outlet floated the possibility today that this could occur as early as Thursday – are jumping the gun.

Neutrality?

We should remember that this is a country in which the head of the Greek Central Bank, a nominally independent body, is the former Greek finance minister Yannis Stournaras, the man who led the implementation of brutal austerity – albeit from a technocratic position, not as a member of a political party. Applauded for ‘stabilising’ the Greek economy, and appointed to the bank to effectively carry on that role, it is safe to say that Stournaras is no great fan of Syriza’s anti-austerity agenda.

There have been hints that Syriza may try and remove Stournaras from this position once in power, appointing a figure they can trust to navigate the negotiations smoothly. Greece’s blood-pressure levels will not only play a crucial role on election day. The game of financial chicken won’t stop with the expected win of Syriza, but will continue throughout the negotiations, which could run for much of this year. The real test for leader Alexis Tsipras will be whether he can steer the country, and his party, through this turmoil and out the other side. This means stopping the country from reaching for the panic buttons.

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