The crushing Greek debt could be canceled the way it was made – by sleight of hand. But saving the Greek people and their economy is evidently not in the game plan of the Eurocrats.
Greece’s creditors have finally brought the country to its knees, forcing President Alexis Tsipras to agree to austerity and privatization measures more severe than those overwhelmingly rejected by popular vote a week earlier. No write-down of Greece’s debt was included in the deal, although the IMF has warned that the current debt is unsustainable.
Former Greek finance minister Yanis Varoufakis calls the deal “a new Versailles Treaty” and “the politics of humiliation.” Greek defense minister Panos Kammenos calls it a “coup d’état” done by “blackmailing the Greek prime minister with collapse of the banks and a complete haircut on deposits.”
“Blackmail” is not too strong a word. The European Central Bank has turned off its liquidity tap for Greece’s banks, something all banks need, as explained earlier here. All banks are technically insolvent, lending money they don’t have. They don’t lend their deposits but create deposits when they make loans, as the Bank of England recently confirmed. When the depositors and borrowers come for their money at the same time, the bank must borrow from other banks; and if that liquidity runs dry, the bank turns to the central bank, the lender of last resort empowered to create money at will. Without the central bank’s backstop, banks must steal from their depositors with “haircuts” or they will collapse.
What did Greece do to deserve this coup d’état? According to former World Bank economist Peter Koenig:
[T]he Greek people, the citizens of a sovereign country . . . have had the audacity to democratically elect a socialist government. Now they have to suffer. They do not conform to the self-imposed rules of the neoliberal empire of unrestricted globalized privatization of public services and public properties from which the elite is maximizing profits – for themselves, of course. It is outright theft of public property.
According to a July 5th article titled “Greece – The One Biggest Lie You’re Being Told By The Media,” the country did not fail on its own. It was made to fail:
[T]he banks wrecked the Greek government, and then deliberately pushed it into unsustainable debt . . . while revenue-generating public assets were sold off to oligarchs and international corporations.
A Truth Committee convened by the Greek parliament reported in June that a major portion of the country’s €320 billion debt is “illegal, illegitimate and odious” and should not be paid.
How to Cut the Debt Without Loss to the Bondholders
The debt cannot be paid and should not be paid, but EU leaders justify their hard line as necessary to save the creditors from having to pay – the European taxpayers, governments, institutions, and banks holding Greek bonds. It is quite possible to grant debt relief, however,
without hurting the bondholders. US banks were bailed out by the US Federal Reserve to the tune of more than $16 trillion in virtually interest-free loans, without drawing on taxes. Central banks have a printing press that allows them to create money at will.
The ECB has already embarked on this sort of debt purchasing program. In January, it announced it would purchase 60 billion euros of debt assets per month beginning in March, continuing to at least September 2016, for a total of €1.14 trillion of asset purchases. These assets are being purchased through “quantitative easing” – expanding the monetary base simply with accounting entries on the ECB’s books.
The IMF estimates that Greece needs debt relief of €60 billion – a mere one month of the ECB’s quantitative easing program. The ECB could solve Greece’s problem with a few computer keystrokes. Moreover, in today’s deflationary environment, the effect would actually be to stimulate the European economy. …
According to economist Michael Hudson, the most successful debt jubilee in recent times was gifted to Germany, the country now most opposed to doing the same for Greece. The German Economic Miracle followed massive debt forgiveness by the Allies:
All domestic German debts were annulled, except employer wage debts to their labor force, and basic working balances. Later, in 1953, its international debts were written down.
Why not do the same for the Greeks? Hudson writes:
It was easy to write down debts that were owed to Nazis. It is much harder to do so when the debts are owed to powerful and entrenched institutions – especially to banks.
Loans Created with Accounting Entries Can Be Canceled with Accounting Entries
That may [not] be true for non-bank creditors. But for banks, recall that the money owed to them is not taken from the accounts of depositors. It is simply created with accounting entries on the books. The loans could be canceled the same way. To the extent that the Greek debt is owed to the ECB, the IMF and other financial institutions, that is another option for canceling it.
British economist Michael Rowbotham explored that possibility in 1998 for the onerous Third World debts owed to the World Bank and IMF. He wrote that of the $2.2 trillion debt then outstanding, the vast majority was money simply created by commercial banks. It represented a liability on the banks’ books only because the rules of banking said their books must be balanced. He suggested two ways the rules might be changed to liquidate unfair and oppressive debts:
The first option is to remove the obligation on banks to maintain parity between assets and liabilities, or, to be more precise, to allow banks to hold reduced levels of assets equivalent to the Third World debt bonds they cancel. Thus, if a commercial bank held $10 billion worth of developing country debt bonds, after cancellation it would be permitted in perpetuity to have a $10 billion dollar deficit in its assets. This is a simple matter of record-keeping.
The second option, and in accountancy terms probably the more satisfactory (although it amounts to the same policy), is to cancel the debt bonds, yet permit banks to retain them for purposes of accountancy.
The Real Roadblock Is Political ….