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Friday, July 1, 2011

Letter to the ECB

Ladies and Gentlemen:

ECB in concert with national Central Banks have in the last 2 years advanced approximately 100 billion EUR to the Greek banking sector. Apart from refinancing short-term credit from foreign correspondent banks (which was cancelled by those correspondents) and apart from financing a significant current account deficit, you have financed “official capital flight” (i. e. via bank accounts) which the Bank of Greece estimates between 50-70 billion EUR in the last 2 years. In simple terms: a wealthy Greek orders his Greek bank to transfer 10 million EUR from his account there to his private account in, say, Switzerland; the Greek bank complies with that order because it has to; and at the end of the day when the Greek bank is short of these funds, it draws down the funds from the ECB (I do not wish to enter into a debate what Target-2 really represents by way of risk. Thanks to double-entry bookkeeping we know that a “liability-to” on the books of one party is a “receivable-from” on the books of the other party).

At times when the issue is to provide financial assistance to Greece, your actions are diametrically opposed to that objective and any informed observer must ask why you did that in the first place without calling attention to the problem.

My first question is: how much additional lending capacity do ECB/Central Banks have to advance funds to the Greek banking sector? Put differently, how much eligible collateral do you calculate Greek banks still have to facilitate funding from the ECB/Central Banks?

My second question is: what will happen when (not if!) ECB/Central Banks run out of lending capacity? During the last 6 months, the Greek banking sector required on average 2,4 billion EUR per month of foreign funding only to finance the current account deficit. Estimates of the Bank of Greece indicate that capital flight still averages around an additional 2 billion EUR per month.

My third question is: how do ECB/Central Banks justify advancing to the Greek banking sector 20-30 billion EUR annually without any public discussion when, at the same time, EU-officials “fight” for weeks over an additional draw-down of 12 billion EUR under a previously approved credit facility?

I presume you analyze national accounts published by the Bank of Greece. Consequently, I presume that you are aware of the following:

1) Greece’s gross foreign debt stood at 408 billion EUR per 31.03.2011 (this figure is never mentioned in public discussions). That is the amount of foreign savings which are presently in Greece and which have to stay in Greece until Greece achieves a current account surplus and/or attracts more foreign investment than the level of outflow of capital.

2) Of the 408 billion EUR, “only” 200 billion EUR was sovereign debt; the larger portion was foreign debt of the private sector (mostly the banking sector). Since the Euro, the funds inflow into the private sector was significantly larger than the net debt incurred by the government.

3) While the government may, in a most optimistic scenario, manage to balance its budget and thereby eliminate the need for new loans, the private sector will need additional foreign savings in massive amounts every year to finance the current account deficit and official capital flight.

Compared with Greece’s other uses of external debt (current account deficit; capital flight), the deficit of the public sector – which is the exclusive subject of debate so far – is in comparably manageable proportions (15-20 billion EUR for 2011). I consider it irresponsible on the part of monetary authorities not to stimulate public discussion about these aspects.

If Greece is to have a realistic perspective for the future, she must curtail imports drastically and build up domestic manufacturing for import substitution; she must stop official capital flight entirely; and she must establish in the short term and only temporarily Free Trade Zones where foreign capital investment is attracted to finance new manufacturing at internationally competitive terms and conditions.

As long as foreign savings are sent to Greece for the purposes of paying for imports and financing capital flight, the money which enters Greece will immediately turn around and land again in foreign bank accounts without any value added to the Greek economy (instead, it will damage the Greek economy even more by de-industrializing it with every passing month).

The need to get the public household in order and to dramatically curtail tax evasion is so obvious that is doesn’t even merit further discussion (and Greece is taking remarkable steps already!). Without an industrial development plan, there is no hope for the government to ever achieve the revenue base required for paying government expenses and interest on debt. And, much more sadly, there is no hope at all for the Greek economy and for the Greeks!

I have made hyperlinks to publications on this subject.

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