Thursday, May 17, 2012

With euros leaving Greece, Greece may need to leave the euro
The question is how long this can continue. Greece has no money. Revenue collections are falling short, and one suspects Gresham's Law may begin operating. One doesn't turn over precious euros to the Greek government if an exit is looming; one hoards them, bringing forward the day when an alternative scrip begins circulating. The mere prospect of bad money may drive out good money. Meanwhile, the flow of euros into depositors' hands ultimately originates at the European Central Bank, and the ECB is no doubt very nervous about continuing to supply them for fear of huge, open-ended exposure to a Greece that is potentially on its way out. The ECB may already be rationing euros to Greece. If that continues or scales up, we are then talking about effective capital controls—the ATMs no longer dispense euro notes—and more pressure for the introduction of alternative scrip in Greece. Exit, in other words, becomes a fait accompli.

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