Friday, August 28, 2015

What did Lucas and Sargent mean?

In their response to Benjamin Friedman's comment on their provocative paper, titled "After Keynesian Macroeconomics," (1978) Lucas and Sargent wrote this:
In his concluding paragraph, Friedman objects to our "rhetorical profile," an objection which several others also expressed at the Conference. To illustrate his point, he cites our reference to "wildly incorrect" predictions of Keynesian macroeconometric models, to "the spectacular failure of the Keynesian models in the 1970s," or their "econometric failure on a grand scale." These phrases were intended to refer to a specific and well-documented historical event. In 1970, the leading econometric models predicted that an inflation of 4 percent on a sustained basis would be associated with unemployment rates less than 4 percent. This prediction was not one which was teased from the models by unsympathetic critics; on the contrary, it was placed by the authors of these models and by many other economists at the center of a policy recommendation to the effect that such an expansionary policy be deliberately pursued
Source:  After the Phillips Curve (pp. 81-82, emphasis added)
Unfortunately, Lucas and Sargent didn't feel the need to spell out exactly what "historical event" they were talking about, and perhaps it was too "well-documented" to require citations to any actual documents.  But what may have been common knowledge among academic economists in 1978 is lost to the rest of us.

So: does anybody know what 1970 "historical event" Lucas and Sargent were alluding to?  And if it is "well-documented," can someone point me in the direction of this documentation?

Wednesday, August 19, 2015

Except for Greece: the ECB's special rules

You know what never happens?  Members of the Federal Reserve Board of Governors never give interviews in which they speculate that America's four largest banks are probably insolvent.  Perhaps this is because they understand that it is their role to prevent and quell financial panics, not to start them.  Or perhaps it is simply because leaking confidential information regarding the financial condition of particular institutions is, technically, illegal.

But the rules are evidently different in Europe, at least when it comes to Greece.  And so we find this, from ECB Executive Board member Benoît Cœuré, conveniently posted on the ECB's website
[F]irst we need detailed information about the situation. For that reason, banking supervisors at the ECB have started a new asset quality review and stress test for Greece’s four major banks. Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years. It is quite clear, therefore, that the banks will require more capital. How much remains to be seen. The banking supervisors will need a few weeks to conclude their assessment.  (emphasis added)
Now, Cœuré isn't telling us anything we don't already strongly suspect.  Perhaps he reasons, what harm can there be in saying so out loud?  

But it does make a difference.  First, it's one thing when, say, a semi-anonymous blogger suggests that Greece's banks might be in a bit of trouble.  It's quite another when a central bank board member declares that it is so.

Second, this sort of thing simply isn't done.  No serious central bank and/or bank regulator (and the ECB is both) would permit such a thing to happen with respect to a bank under its jurisdiction.  But, as we're learning, the ECB doesn't behave quite like any other central bank or bank regulator. While EU law specifically provides that "[n]o action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency," the bank has operated as if the words, "except for Greece" were somewhere in its charter.  Cœuré's cavalier treatment of the insolvency of the Greek banking system is one more reflection of this (technically illegal) attitude.

But that's not the worst of it.

In the sentence before he declares the four largest Greek banks clearly insolvent, Cœuré explains how this state of affairs came about: "Those credit institutions were adequately capitalised, but they are now operating in an extremely difficult economic environment, and non-performing loans are likely to increase in the next few years." (emphasis added)

That is, some recent event bankrupted these four institutions.  Now, unless there was some major natural disaster that didn't make the papers, Cœuré can really be referring to only one thing: the decision by the ECB to cease providing liquidity support to the Greek banking system in June.

Take a moment to think about what that means.  What Cœuré appears to be saying is that, at the end of June, the ECB cut off liquidity to adequately capitalized Greek banks and, consequently, bankrupted them (Aside 1).

I've cited it before, but it's worth repeating the content of "whereas #30" from the regulation linked to above, which characterizes the ECB's mission with respect to banking:
The ECB should carry out the tasks conferred on it with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system of the Union as well as of individual participating Member States and the unity and integrity of the internal market, thereby ensuring also the protection of depositors and improving the functioning of the internal market, in accordance with the single rulebook for financial services in the Union. In particular the ECB should duly take into account the principles of equality and non-discrimination. 
Maybe it's a problem with the English translation, but hard as I try, I can't find the words "except for Greece" in there anywhere.

Aside 1: It is, of course, open to question whether Cœuré is right -- i.e. whether the banks really were adequately capitalized.  Personally, I'm skeptical.  The point, however, is that this is the ECB's semi-official story of what happened.  The fact that it may also be false doesn't seem to make it better.

Sunday, August 16, 2015

Greece: Inefficiency Illustrated

Here's a puzzle.  If you read about the Greek financial crisis in the press -- general or "high-end" financial press, it makes no difference -- you will undoubtedly encounter the pronouncements of European officials (and others) that the Greek economy is so terribly inefficient, so bureaucratically hidebound, that massive reform is a precondition for any improvement in Greek economic conditions, not to mention a precondition for any forbearance on Greek public debt.

But if, instead of the press, you read the official statistics published by the Eurogroup, you learn that, prior to the 2010 crisis itself, Greece was simply a slightly-below-average European economy.  Not great, but hardly the borderline-Third World country we are invited to imagine by the public narrative.

Where does this dissonance come from?  And, more to the point, what drives the passion with which the "Greek way" is condemned?

To try to answer these questions, I need to employ a couple of cultural stereotypes as shorthand (Aside 1).  Specifically, I'm going to resort to the notions of Anglo-Saxon and Mediterranean political cultures. Yes, that again.  But bear with me.

Now, try as we might, nobody gets passionate about statistics.  Data may play a role in forming our opinions, but to really rile us up takes an anecdote.  So here is one:
This [the difficulty of doing business in Greece] is best encapsulated in an anecdote from my visit to Athens. A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales.  However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. 
Source:  Megan Greene, H/T: Tim Taylor, H/T: Mark Thoma  
If, like me (Aside 2), you are a product of Anglo-Saxon political culture, this sort of thing probably makes you crazy.  The waitress has to across the street to get the coffee?  It's bizarre, somewhere between jaw-droppingly stupid and flatly outrageous.  What sort of government makes rules so dumb that that is the only way to comply?

But stop for a moment, count to ten, take a deep breath, and ask yourself: how much actual economic waste is taking place in this story?  The café employs a waitress to fetch coffee from across the street. Well, yes, but many cafés do employ waitresses, even when the coffee is made inside the establishment. The trip is certainly longer than the trip to an in-house coffee maker, which probably means that she'll have less time to perform the sort of tasks that servers do between taking and delivering orders. So, there is clearly some economic cost.  But, on reflection, it doesn't seem likely to be very large.

More to the point, the emotional impact on the Anglo-Saxon mind  of this anecdote is probably disproportionate to the actual economic cost by quite a wide margin.  Eye-popping as anecdotes like this are (and there are lots of anecdotes), they may be perfectly consistent with a no-worse-than-mediocre aggregate economic performance.  And remember:  "average" EU output per capita is actually pretty rich by global standards.

One more cultural point: The first thing that strikes the Anglo-Saxon mind about the law in the cafe anecdote is: what a silly law that was to make.   I suspect that the first thing to strike the Mediterranean mind would be: what a silly law that was to obey.  The Anglo-Saxon asks: what were the lawmakers thinking?  The Mediterranean asks: why didn't the cafe owner just buy the coffee machine and not tell anyone?

To the Anglo-Saxon, rules are rules.  (All the more important not to make silly ones in the first place!)  To the Mediterranean, rules -- at least silly ones -- are meant to be broken, often in exchange for a "small fee."  (Joke: bribes are what Greeks pay instead of taxes.)

Here's the thing: doing business in a Mediterranean culture is tricky enough if  the "Mediterranean Way" is your native tongue.  It's darned near impossible (and sometimes literally impossible) if, Anglo-Saxon-style, you actually try to follow the rules as written.  

Which means, by the way, that the Mediterranean Way can function as a non-tariff trade barrier, protecting domestic businesses from Anglo-Saxon competition.  I'll have more to say about that, and its relevance to the particular reforms being pressed on Greece by its creditors, in a later post.

Aside 1:  Employing stereotypes like this is always a bit dubious, and if there's anything worse than economists going out in a "blaze of amateur sociology," it's going out in a blaze of amateur cultural anthropology.  The reader should take appropriate cognitive precautions.

Aside 2:  I'm actually a bit of a hybrid.  My father's family is from southern Italy and Sicily; my mother is descended from English Methodists.  But in terms of political culture, I seem to be firmly anchored in the Anglo-Saxon way of thinking.  Make of that what you will.

Thursday, August 13, 2015

What is it with economists and accounting identities?

It's very strange.  There seems to be something about accounting identities that causes otherwise reasonable economists -- pardon my bluntness -- to become either stupid or duplicitous.  The most famous example is probably Eugene Fama's painfully embarrassing blog post in which he seriously claimed that the national income accounting identity proved that stimulus spending could not possibly work.  (Aside 1)  But now Mark Thoma points us to what may be a new classic of the genre, written by Thomas Klitgaard and David Lucca  and published on the New York Fed's website.

The subject of Klitgaard and Lucca's piece is whether large-scale central bank asset purchase programs, like that announced by the European Central Bank this January, are likely to cause financial outflows.  This sounds like a worthwhile topic on which the New York Fed's Research and Statistics Group might have something valuable to contribute.

But a warning sign appears in the very first paragraph, where the authors allude to arguments which "ignore balance of payments accounting."  Uh oh.

There follows a brief tutorial on balance-of-payments accounting, explaining (correctly, of course) that a country's current account (its exports and imports of goods and services) is balanced by its financial account (its exports and imports of financial assets).  This is an accounting identity, true by definition.  So far, so good.

Then follows this paragraph:
Suppose for the moment that the ECB’s asset purchase program, by driving down interest rates, causes investors to consider investing abroad. Also assume that the euro area’s current account balance remains unaffected over the near term by the monetary policy shift. Then net financial outflows must be unchanged and any increase in the pace of domestic purchases of foreign assets can only be realized if foreign investors match that increase by buying more euro area assets. In other words, the desire to invest abroad may be there, but financial outflows are constrained by the current account and financial inflows. That means that the exchange rate and other asset prices need to move in response to the ECB policy change to keep financial outflows consistent with balance of payments identities.  (emphasis added)
Let's start with this:  "Also assume that the euro area's current account balance remains unaffected...." Now, the authors have just established that, by definition, a change in the balance of the financial account is a change in the balance of the current account.  They are linked not by some causal relationship, but by an accounting identity: they are the same thing.  Consequently, an assumption that the euro area's current account remains unchanged is exactly the same thing as an assumption that the financial account remains unchanged.

In other words, the authors have done nothing less than smuggle their conclusion in as an assumption. Did they fail to notice that they were assuming their conclusion?  Or did they simply rely on their readers' failure to notice the sleight-of-hand?

You might be inclined to guess "duplicity" rather than "stupidity," but the remainder of the paragraph is sufficiently muddled to suggest that the authors may actually not understand the accounting identity they're relying on.

For instance, they say this: "the desire to invest abroad may be there, but financial outflows are constrained by the current account and financial inflows."

Here's a rule of thumb for talking about accounting identities: Accounting identities do not constrain behavior; they constrain accounting.  If you find yourself saying or implying that an economic actor cannot do something they want to do because of an accounting identity, you have lost the thread.  Backtrack and rethink.

The authors also say: "exchange rate and other asset prices need to move in response to the ECB policy change to keep financial outflows consistent with balance of payments identities."

Here's a second rule of thumb for talking about accounting identities: Accounting identities are not enforced by mechanisms (like price changes); they are enforced by accounting.  If you find yourself saying or implying that accounting identities are preserved by some process of adjustment, you have lost the thread.  Backtrack and rethink.

So how does the accounting actually work in this case?

There are two key definitions to keep in mind.  First, exchanges of financial assets for other financial assets are not net financial flows.  They net to zero.  Second, money is a financial asset, just like any other (e.g. bonds and promissory notes).

Suppose, as Klitgaard and Lucca suggest, that I am in France, that I have a million euros handy, and that I wish to invest abroad (say, in U.S. Treasury bonds).  The first thing I do is spend my €1.0 million to buy (say) $1.2 million.  Next, I spend this $1.2 million to buy $1.2 million worth of Treasury bonds.  Notice that both of these transaction are simple exchanges of financial assets. Under the rules of the balance-of-payments accounting game, neither of these transactions constitutes a net financial flow.

So, I can invest my €1.0 million in U.S. Treasury bonds, and yet there is no "financial outflow" from France to the U.S.  How can this be?  Simple:  "financial outflow" in balance-of-payments accounting doesn't mean what you probably thought it did.  (Aside 2)

Notice also that, although I assumed that exchange rates and asset prices exist, the zero-net-flow outcome doesn't depend in any way on what they are or how they change.  That's how accounting identities work: they are preserved in all states of the world, simply by the rules for how individual transactions are written down.

What's really puzzling is that Klitgaard and Lucca's real point doesn't depend on accounting identities at all.  Their piece, read as a whole, seems to be making an unobjectionable argument:  currency markets move faster than bond markets, so exchange rates (rather than changes in portfolio composition) should be expected to do the lion's share of adjusting to the new central bank policy; and so it seems to have happened.  Why in the world do they get tangled up with accounting identities at all, and why do they go so completely off they rails when they do?

I can only guess about the reason for bringing up the accounting in the first place, but accusing one's rhetorical opponents of failing to "get" basic accounting identities and adding-up constraints does seem to be a pretty standard trope in international economics. (Aside 3)

The deeper cause of the problem, I suspect, has to do with economists' ingrained professional habit of "thinking in equilibria."  Accounting identities look a lot like equilibrium conditions, and one of the first thing an economist asks (or should ask!) about a posited equilibrium is, "How does the economy get there, and once it is there, what keeps it there?"  That is, the very idea that a system has an equilibrium implies that it is logically possible for the system to exist in some non-equilibrium state, and for the equilibrium to be meaningful, it must be accompanied by some dynamic mechanism that moves the system towards it equilibrium point.

But accounting identities are nothing like equilibria.  Each and every logically conceivable transaction preserves the accounting identities.  The "system" is never "out of equilibrium" and there is no "mechanism" for pushing it towards some "equilibrium" state.  As a result, reasoning about accounting identities with a mind pre-disposed to "think in equilibria" seems to make the cognitive equipment go a little haywire.

Aside 1:  I stopped reading Gene's blog (much to my own disappointment) at this point.  Why?  At the time, I assumed that he could not possibly be stupid enough to make such an elementary error, so I believed that he must have been using his blog as a platform for lending his professional prestige to politically useful "soundbite economics" in which he did not personally believe.  I was disappointed, because Gene is smart and interesting, and I had been looking forward to learning a lot from him.

Aside 2:  What is a financial outflow?  A financial outflow occurs when a country imports financial assets in exchange for exporting goods and/or services.  This is also known as selling stuff. Exporting financial assets in exchange for imports of goods and/or services (sometimes called buying stuff) is a financial inflow.  The connection between the financial account and the current account suddenly seems a lot less mystical, doesn't it?  The only really counter-intuitive bit is the way that "paying with money" and "paying with debt instruments" are the same thing for these purposes.

Aside 3: Paul Krugman, for example, employed the same trope twenty years ago (see the section on Investment and Trade Balance).  He also segues rather breezily from talking about the accounting identity to how things happen "in practice," by which he means, "forget about the accounting identity, let's talk about the path between two equilibria."

Friday, August 7, 2015

Greek economy: How terrible? (Part 3)

The story so far:

In Part One, I posted data from Eurostat showing that prior to the present crisis, Greek GDP per capita, on a purchasing power basis, was about 93% the 28 country EU average.  Not great, but good enough to suggest the horror stories about the terrible state of the pre-crisis Greek economy are somewhat overblown.

In comments and on his own blog, Nick Rowe asked whether the Greek government budget deficit might have raised this figure, and, consequently, whether balancing the Greek government budget could have an impact on Greece's (PPP-basis) real GDP, quite apart from the demand-side macroeconomic effects.

In Part Two, I agreed with Nick that this is at least a theoretical possibility.  (I say "theoretical" simply because, in my toy model, I find effects in running in both directions, and it's an empirical question which one dominates.  I don't mean to imply that it is implausible or some kind of weird edge case.)

In this part, I want to look at the potential magnitude of the issue -- that is, how much should this possibility lead us to modify the picture of Greek economic performance painted in Part One?

According to Eurostat, Greek exports in 2008 totaled €21.3 billion, and Greece's nominal GDP was €242.1 billion, so exports accounted for a little less than 9% of the total Greek economy.  In 2007, exports accounted for about 8.3% of Greek nominal GDP, and they 2006 accounted for just under 8%.  So, roughly, let's say that exports amounted to something like 8.5% of Greece's pre-crisis output.

The next question is how "overpriced" those exports were, due to the Greek government budget deficit.

This involves us in the tricky business of trying to say just how large the pre-crisis Greek budget deficits were.  Eurostat declines to publish figures for years prior to 2011, citing the dubious state of Greek statistical reporting.  So, like everyone else, we're going to have to make an educated guess.  One thing Eurostat can tell us is that the Greek government's outstanding debt totaled €356 billion at the end of 2011.  That debt was years in the making, and how much each year contributed is hard to say.  I'm going guess that from 2006-8, the Greek deficit averaged €45 billion (a bit more than double the 2011 level), effectively attributing just over one third of the Greek national debt to those three years.

Now the really hard question:  how much could €45 billion in spending, largely on things like transfer payments (i.e. pensions), government salaries, and so forth, move the global prices of products Greece exports?  The total EU market for tradeable goods is €2.5 - €2.7 trillion (gross annual intra-EU exports for 2006-8) divided by the fraction of tradeable goods that are actually exported.  If we assume, more or less at random, that only half of tradeables produced are consumed domestically, that gives us a total EU market for tradeables of around €5.2 trillion.  Let's also assume that only half of the Greek government deficit is absorbed by spending on non-tradeables, so that the Greek deficit increases total spending on tradeables in the EU by about 0.4%.  (Except, of course, for the fact that the deficit is actually financed by other people -- say, French and German bank depositors -- not spending; the Greek deficit is not simply an addition to EU-wide demand.  But let's assume that the forgone spending would have consisted entirely of spending on non-tradeables.)

Assuming a zero elasticity of real supply, so increased spending on tradeables is completely reflected in price increases, we're looking at a price impact of less than one-half of one percent.

Now, that's an enormous heap of assumptions.  And it's not necessarily fair to look at the entire range of tradeable products; Greek-produced tradeables are not distributed across sectors in the same way as the EU as a whole.  (But they may be less different than you guess; in 2007, about 25% of Greek exports were machinery or chemicals, and the value of its food exports was matched by that of its oil exports.  It's not just about olives!)  The real point of the exercise is to provide some sense of the relative scale of the Greek government deficit compared with the EU economy as a whole.  And the upshot is that it's hard to imagine a very small player like Greece having much of an impact on EU-wide market prices for...well, anything really.

But let's go wild and assume that the prices of Greek exports were increased by ten times as much as our wild guess -- that is, by 4%.  That would mean that 4% of 8.5% of the Greek economy might have been "fake," to borrow Nick's term.  That's about 0.34%.

Or, in other words, if not for the Greek budget deficit, the measured GDP per capita of Greece might have been, not 93% of the EU average, but a mere 92.66% (or, in round numbers, 93%).

To get a material effect via this channel, you need to argue that the Greek budget deficit...I don't know...doubled the global price of oil, for example.  I'm just not seeing it.

The bottom line seems to be that the original impression was correct:  that, pre-crisis, Greece had a slightly below-average economy, certainly well below German standards of efficiency (the latter had a GDP per capita about 16% above the EU average), but hardly the Third World backwater of popular imagination.

Thursday, August 6, 2015

Schäuble's ticking clock

Here's a fact about the Greek financial crisis that doesn't seem to be widely reported: in just under five months, the rules of the game are going to change, and the changes will probably tilt the balance of power in favor of the Greek government and against the Troika.

Here's the story.

As we've learned over the past two months, the Troika's biggest stick is the ability (and willingness) of the European Central Bank to cripple the banking system of a Eurozone member state by denying it liquidity.

Now, for a central bank to deliberately destabilize a financial system under its care is, as far as I can tell, unprecedented in the history of modern central banking.  And it is unimaginable that the countries composing the Eurozone would have signed up in the first place if the ECB "charter" had explicitly given the central bank the role of "enforcer" of the terms of the growth-and-stability pact (or of pretty much anything else).  So the ECB's actions would have been jaw-dropping enough under the original rules of the Eurozone.  But the reality is worse.

In 2013, the European Commission designated the ECB to be the authoritative bank regulator for the Eurozone.  (1)  The ECB is the entity charged with determining whether a particular bank is solvent.  It is also charged with the responsibility to take early action to force the resolution of insolvent (and likely-to-become insolvent) banks in such a way as to preserve the smooth functioning of the financial system of the Eurozone and of each member state.

It's hard to avoid the conclusion that, if Greece's banks are in such trouble that the ECB is remotely justified in refusing to provide liquidity support, that the ECB is also, in its role as bank regulator, obliged to shut those banks down and see that they are rapidly restructured and recapitalized.

In other words, the ECB is explicitly required by its own enabling legislation to prevent the state of affairs which it deliberately created in Greece.

So what happens in 2016?

On January 1, the final piece of the Eurozone banking union puzzle falls into place:  the responsibility for structuring bank resolution programs will shift from national resolution authorities to a Eurozone-wide Single Resolution Mechanism (SRM), backed by a Single Resolution Fund (SRF).  The goal of this institution is to break, one and for all, the link between the solvency of any particular national government and the stability of its banking system.  In other words, its purpose is to take away the very leverage the Troika has been using to force concessions from the Greek government -- the threat that "insolvent government = banking system collapse."

The Single Resolution Fund is also, to be perfectly frank, a de facto transfer union.  Nominally, of course, it is no such thing, because there must never be such a thing, because...reasons.  How does this work?  The SRF is to be funded by compulsory levies charged against banks.  These, we are assured, are not taxes, and banks are not taxpayers, so no tax money is involved. (Seriously.) In any event, over the next several years (there's a transition formula), the SRF will evolve from a nationally compartmentalized fund into a single entity fully mutualizing the cost of bank resolution across all countries of the Eurozone.   And in the interim, the fund is authorized to borrow against future charges-to-banks-that-are-not-a-tax-because-reasons.

What does this mean for Greece?  A couple of things.  First, it gives the Greek government a way to force the "are they solvent or aren't they" issue.  If the Greek national authorities declare one or more banks to be in danger of insolvency, they can ask the SRM to help create a resolution plan.  The ECB could prevent this, but only by explicitly declaring said banks not merely solvent, but safe.

Second, the existence of the SRF, even in its initial "compartmentalized" form, drastically reduces the uncertainty associated with declaring a Greek bank insolvent.  Under current rules, it's not 100% clear that the ECB is required to provide financial support to make an orderly resolution feasible.  (I would argue that it's strongly implied, but given the ECB's demonstrated willingness to ignore its responsibilities when it come to Greece, I certainly wouldn't rely on it.)  The responsibilities of the SRF are indisputable.

So: it is settled EU policy that the insolvency of a particular Eurozone government shall not destabilize the financial system in that or any other Eurozone country.  And, to that end, financing bank resolutions is a responsibility of the Eurozone banking system as a whole, not of individual Eurozone governments.  Good.  But it's hard not to suspect that some in the EU, in writing and blessing these rules, had in mind a silent caveat: "except for Greece."

In fact, it's not hard to imagine what might happen if the first use of the SRF were to recapitalize, say, Alpha Bank.  The German press, among others, would take a sudden interest in the SRM and the SRF, and might not be inclined to accept the notion that compulsory payments to a governmental entity are, in some fundamental sense, not "taxes."  And somebody, somewhere will accuse the Merkel government (with some justice) of having signed on to a stealth transfer union, which is "bailing out" Greek banks.  Hijinks ensue.

How could EU policymakers have convinced themselves that that the SRM would never be applied to Greece?  My personal guess would be that it involved the same form of self-deception entailed in all games of "kick the can down the road," the expectation -- born more of wishful thinking than of reason -- that, somehow, these things will work out before the moment of truth arrives.

But now the moment of truth is awfully near.

All of which might help to explain Wolfgang Schäuble's evident desire to push Greece out of the Eurozone as quickly as possible.  There's a ticking clock: in five months, it becomes a whole lot harder for the Troika to hold the Greek banking system hostage, and the consequence of trying -- the activation of the SRM to recapitalize insolvent Greek banks -- could have interesting political repercussions in Germany and elsewhere.

I'm very curious to see what's going to happen next.


(1) This became effective on January 1, 2014.  The ECB exercises direct supervision of a number of large banks, while supervising the rest through the national regulatory authorities.  However, there seems to be no doubt of the ECB's authority to override the judgment of a local regulator should a difference of opinion arise as to the solvency of a particular institution.

Wednesday, August 5, 2015

Greek economy: How terrible was it (part 2)

Nick Rowe raises an interesting question about the chart I posted earlier appearing to show that the performance of the pre-2010 Greek economy was, while hardly stellar, nothing like the train-wreck you might expect based on the public discussion surrounding the Greek financial crisis. The question, as I understand it, boils down to this:  could the microeconomic effects of Greek government borrowing (i.e. its impact on relative prices) affect the measurement of macroeconomic variables (particularly real GDP)?  And, if so, should the effects be regarded as "fake?"

I think the answers are "yes" and "no," respectively.

The "yes" part is fairly easy to see.  French and German banks loaned money to the Greek government that, otherwise, would have been loaned to and spent by somebody else.  There's every reason to suppose that the different "candidate spenders" would have bought different things, so the choice of spenders has an effect on the relative prices of stuff they buy.

Changes in relative prices affect real GDP.  The effect is most visible in cross-country comparisons on a purchasing power parity (PPP) basis, but it also plays a role in "longitudinal" real GDP within a single country.

To see how this works in the cross-country case, consider Saudi Arabia.  The real value of its output in any given year depends rather a lot on the real price of a barrel of oil.  A real rise in the price of oil (i.e. in increase in the nominal price of oil that outpaces the rise in the general price level) makes Saudi output more valuable, in terms of the goods and services produced by the rest of the world, even if the quantity of oil in that output is unchanged.   

The effects of relative price changes on longitudinal real growth rates within a single country are more roundabout.  Conceptually, a national real GDP growth rate is a weighted average of the growth (in quantity) of output of each good and service produced.  We naturally want to weight each product-level growth rate in accordance with the importance of that product in the overall economy. That, it turn out, we usually measure by the share of each product in nominal output, which may be affected by its price.

Considering the Saudi example again, a rise in the price of oil (if not completely offset by a reduction in quantity) would increase the weight of the oil industry's growth rate in the calculation of the national growth rate.  If the output of that industry is rising faster than average (1), this will tend to raise the measured growth rate of the country, but if (as is entirely possible) output of the oil industry is growing slower than average, an increasing price will tend to decrease the measured growth rate of the country as a whole.

The take-away is that real GDP is always and everywhere affected by the relative prices used to calculate it.  (The difference between nominal and real GDP is not that the latter excludes the influence of relative price changes, but that it excludes the influence of changes in the general price level, i.e. inflation. (2) )

Does that mean that real GDP is "fake?"  Only if you imagine that real real GDP would be somehow unaffected by relative prices.  But how could that be?  How do you add up the quantities of compact cars, bars of soap, and haircuts an economy produces every year without relying on relative prices?  (My proposal to measure the output of all goods and services in metric tons, thereby giving proper meaning to the term "weighted average," has so far garnered little support.)

But what about the real question: would balancing the Greek government budget inevitably reduce the Greece's real GDP vis-a-vis the rest of the EU, on a PPP basis, even if  the impact on aggregate demand was fully offset?  

I think the answer is no.  Even assuming, as Nick suggests, that balancing the Greek budget would reduce domestic demand for Greek tradeables enough to lower their EU-wide prices, it's not clear what the impact of the offsetting increases in aggregate demand would be.  If, as seems plausible, that the offset came largely in the form of increased demand from the rest-of-the-world for Greek exports, the price of Greek tradeables might not fall after all, and might even rise.

The bottom line is this:  if "austerity" is simply a re-arrangement of aggregate demand for Greek goods and services (i.e. a change in who does the spending and in the mix of what they buy), as it should be, there's no reason to assume that the reallocation has to lead to a net decline in relative, PPP-based GDP.


(1)  I.e. the weighted average growth rate of all other industries.

(2)  I think Nick may have inadvertently muddied the waters here by thinking about the question through the prism of exchange rates.  The Canadian example with which he begins his post involves an across-the-board change in all prices (because they are measured at a market exchange rate which has fallen).  Naturally, that change appears "fake," just as if we decided to measure GDP in pennies rather than dollars ("Look!  It's up by a factor of 100!").  But the difference between a change in the price level and one in relative prices is a crucial one in this context.

Thursday, July 23, 2015

Greek economy: How terrible was it?

It has become conventional wisdom that the Greek economy desperately needs massive structural reforms, lest it be doomed to eternal Third World status.  Or something.  And among the Wise Old Heads of Europe, it is agreed that the current crisis offers an opportunity too good to miss: a chance to force structural reforms on Greece, undoubtedly for its own good.

But, prior to the crisis itself, exactly how terrible was the Greek economy?

One indicator we might want to look at is Greece's per capita output compared with that of the EU as a whole, on a price-harmonized (i.e. purchasing power parity) basis.  Conveniently, Eurostat publishes exactly that, expressed as an index for each country with the annual EU average pegged at 100.  Here's what it looks like, with Germany included for comparison.

From 2003 to 2009, Greece averaged 93 (i.e. its per capita output was around 93% of the EU average), with no particular trend evident.  That is, a slightly below-average performer, but basically keeping up with growth in the EU as a whole.  Note in particular that the 2008-9 recession didn't hit Greece any harder than the average EU country.

The train wreck, of course, occurred in 2010 and beyond -- that is, the "bailout years."  By 2014, "reforms" had reduced Greek output per capita from 94% of the EU average (in 2009) to 72%.  (Aside 1, Aside 2)

So let's get back to the original question:  How terrible was the Greek economy?  Not terrible at all, it turns out.  Certainly mediocre: it's not hard to find richer or more dynamic countries.  But hardly the crony-socialist nightmare economy you might expect based recent public discussion.

Why, then, all the high dudgeon about the urgent need for radical reform of the ostensibly corrupt and hidebound Greek economy?  It's easy to say that it's self-serving rhetoric, but that begs the question:  why does this rhetoric actually serve anyone?  Why does it go over so well?

That question opens up the issue of the role of moral reasoning in economic policy, which deserves a post of its own.  (OK, probably more than one.)  Because the "rhetoric of reform" has less to do with pragmatic, technical policy-making than with the (moral) intuition that some things are just wrong and must be punished, no matter what the consequences or cost.

Aside 1:  I know, I know: "If only there had been more austerity, things would be different."  Undoubtedly.  Not better, perhaps, but surely different.

Aside 2:  Over the same period, German output per capita grew from 115% of the EU average to 124%.  Well played, Germany!

Sunday, July 19, 2015

Easier than you think: How to devalue the Greek Euro

It's more-or-less universally agreed that if Greece still had its own currency, devaluation could help the country recover from its current economic depression.  It's also agreed that, lamentably, this is not possible without Grexit.

But there may be a way.  Consider:  devaluation works by raising the prices of imports (in the local currency) while reducing the prices of exports (in foreign currency).  That is, a devaluation acts like a tariff -- a positive tax on imported goods and services and a negative tax (i.e. a subsidy) on exports.

Do you know what else acts like tariffs?  Tariffs.

So if we want to emulate a Greek currency devaluation, we could simply impose a tariff on Greek imports and dedicate the revenue thus collected to export subsides.  (And yes, it would probably be a good idea to have an outside entity involved in collecting and disbursing the money involved, rather than relying on local authorities.)

Now, like any option that might actually help the Greek economy (and, by the way, increase the probability that Greece's creditors will someday be repaid), this strategy will undoubtedly be ruled UNTHINKABLE by the Wise Old Heads of Europe.  (Aside 1, Aside 2).

Of course, the real fun to be had by tabling a proposal like this would be to watch German politicians complain that a tariff along these lines (especially if it might be generalized to other depressed debtors in the  Euro zone) would hurt German exports.  (For an explanation of why this is so funny -- and it is -- see Aside 3.)

(Aside 1)  The EU appears to have bred its own special variety of Very Serious People for which we need a name.  I'm proposing "Wise Old Heads of Europe," or WOHEs for short.

(Aside 2)  The correct response to anyone who tells you that something is "unthinkable" is, of course, "Think harder."

(Aside 3)  For any particular country, net lending equals net exports.  Borrowers run trade deficits, lenders run trade surpluses.  (This is neither theory nor observation; it is an accounting identity, true by definition.)  Therefore, for Germany to "collect on its debts," its trade surplus must suffer.  So the ostensible goal of German policy towards Greece an other Euro debtors has always been to hurt German exports.  The difference is that the direct application of tariffs might work.

Thursday, July 16, 2015

Greece: Growth or Recovery?

It's no secret (not anymore!) that macroeconomics, as a social science discipline, has problems.  Best known, of course, is the fact that research into macro stabilization policy has made no substantive progress -- and arguably has regressed -- over the last forty years or so.   But there's a second problem, which runs deeper and which may have helped cause the first.

I call this "Barro's Disease," based on the observation by economist Robert Barro that once you begin to study the determinants of long-run growth, it becomes hard to pay much attention to anything else.

Here's a slightly more elaborated version of that statement, excerpted from Barro & Sala-i-Martin's leading textbook, Economic Growth:
Even small differences in these growth rates, when cumulated over 40 years or more, have much greater consequences for standards of living than the kinds of short-term business fluctuations that have typically occupied most of the attention of macroeconomists. To put it another way, if we can learn about government policy options that have even small effects on long-term growth rates, we can contribute much more to improvements in standards of living than has been provided by the entire history of macroeconomic analysis of countercyclical policy and fine-tuning. Economic growth—the subject matter of this book—is the part of macroeconomics that really matters.  (Barro &  Sala-i-Martin, Economic Growth, 2nd Edition, p. 6).
While there is something to be said for this point of view (although see Aside 1), the consequence is a sort of blindness to anything that happens on a one-to-three decade time scale.  It is this blindess that I call "Barro's Disease."  (Aside 2).

What has all of this to do with Greece?  Simply this: the assertion that structural reform should be the highest priority for the Greek economy is nothing more than a symptom of Barro's Disease.  It rests not on an analysis of alternative policies and paths for the Greek economy, but on an unexamined assumption that "growth is what really matters."

But is it?  My view is that this is primarily an empirical question:  magnitudes matter.  But before we get to the arithmetic, we do need to deal with the question of how to weight costs and benefits in different time frames.  On this subject, I propose a pragmatic punt:  let us recognize that we are not discussing permanent policies to determine the growth path of the Greek economy into the infinite future.  Instead let us assume that, whatever we do now, twenty years from now, Greece will adopt optimal growth policies, the effect of which will, naturally, dwarf anything that happens in the next twenty years (at least within the inter-temporal discounting framework implied by growth theory).  (Aside 3.)

Alright -- let's talk numbers.  First, let's stipulate that the Greek economy in the late 2000's was sclerotic, corrupt, and very, very inefficient.  Under these conditions, Greece was able to produce an aggregate annual output of roughly EUR 240 billion (Greece's GDP in 2008).  Today, its annual output has fallen to about EUR 180 billion (Greece's GDP in 2014) .

Now, let's consider two policy scenarios.  In "growth scenario," structural reforms are imposed, boosting Greek output by 3% every year for the next twenty years.  In the alternative "recovery scenario," Keynesian stimulus pushes Greek GDP back to its 2008 level, but reforms stall and, as a consequence, Greek GDP stagnates -- zero growth for the ensuing eighteen years.  (The latter is basically the nightmare scenario invoked by reform enthusiasts warning of the dire consequences of "taking the easy way out.")

These assumptions, plus a few minutes with a spreadsheet, yield two hypothetical twenty-year paths for Greek GDP.

Under the "growth" scenario, Greek GDP in year 20 is 35% higher than under the "recovery" scenario.  However, it takes ten years for "growth" GDP to even catch up with the "recovery" GDP level.  It takes seventeen years for the cumulative "growth" GDP to match the corresponding number for the "recovery" scenario.  And over the entire 20 year time frame, cumulative "growth" GDP outstrips cumulative "recovery" GDP by only 4%.

Which path is better?

Well, if you have access to time travel or a cryogenic stasis chamber with which to "skip over" the next decade or two, the "growth" scenario has a certain appeal.  If, on the other hand, you actually have to live through those years, there's a pretty strong case for "recovery," even followed by a couple of decades of stagnation.

What if you're a creditor?  Assuming (I know, this is a hard one to swallow) that Greek debt service payments will be constrained by Greece's ability to pay (proxied by cumulative GDP), and if you care at all about the timing of the payments you receive, the "recovery" scenario is clearly preferable.

Now, does all of this mean that structural reforms, economic efficiency, and growth are unimportant?  Not at all.  In fact, the balance of trade-offs depends crucially on the depth of the recession, which determines the size of the boost received from simply recovering to the current-efficiency-full-employment level of GDP.  If "recovery" only meant, say, a 10% increase in GDP from the depressed level, all other assumptions being the same, the outcome would be quite different.

And that, I think, is why "Barro's Disease" merits being called a disease.  By inculcating the notion that long-run growth is always and everywhere more important than counter-cyclical policy, it tends to insulate economists' policy advice from the concrete facts of the problem at hand.

(Aside 1)  I've always thought that there was a fundamental problem with the evidence used to denigrate the importance of the cyclical stabilization in modern economies: the scale of cyclical fluctuations tends to be inferred from periods in which governments were actively stabilizing the economy (or in which the "fortuitous" advent of a global war forced governments' hands).  That counter-cyclical policy has had some success in recent decades does not seem valid evidence that counter-cyclical policy does not matter.

(Aside 2)  As an exercise for the reader, try to write down an inter-temporal utility discount function that corresponds with this weighting of near- and far-future events.  For extra credit, describe the effect of applying this function to the evaluation of global climate policy.

(Aside 3) If the optimism of this assumption seems troubling, the reader should feel free to adopt the alternative assumption that, twenty years from now, Greece will adopt disastrous economic policies, and remain stuck for all eternity at the level of prosperity characteristic of, say, Sub-Saharan Africa today.  The implications for current policy are the same.

Wednesday, July 15, 2015

Spokesman: Greece to Go the Extra Mile to Appease Creditors

Athens, Greece --  A government spokesman today revealed that the Greek government would honor the Troika's demand that it transfer ownership of specified airports, ports, and other public assets to an independent privatization fund.  Moreover, as a gesture of good faith, the government plans to transfer certain additional assets not specifically identified in the Troika's proposal, notably a two-year old Palomino mare which had previously been the property of the daughter of an unidentified government minister.

"We offer this as a first step toward repairing relations between the government and our partners in the EU," the spokesman explained.  "Greece is committed to delivering on all of its commitments to the international community.  And a pony."

Monday, July 13, 2015

Euro Summit Statement: A Glimmer of Sanity?

It's very odd.  The statement of the Euro Summit, issued in Brussels yesterday, could reasonably bear the title, "More of the Same -- Only More So!" (or, perhaps, "Take That, You Socialists!").  However, tucked away, in what is literally the last paragraph of the document, is this:
To help support growth and job creation in Greece (in the next 3-5 years) the Commission will work closely with the Greek authorities to mobilise up to EUR 35bn (under various EU programmes) to fund investment and economic activity, including in SMEs. As an exceptional measure and given the unique situation of Greece the Commission will propose to increase the level of pre-financing by EUR 1bn to give an immediate boost to investment to be dealt with by the EU co-legislators. The Investment Plan for Europe will also provide funding opportunities for Greece.
Stimulus spending?  To support growth and job creation?  It is almost as if someone, somewhere, has come to the realization that austerity is contractionary.   (Aside: spell-check wants to replace "contractionary" with "contradictory."  It has a point.)

Of course, there are still some important questions.  Is EUR 35 billion enough?  It's around 20% of Greece's 2014 GDP.  If it's heavily front-loaded and concentrated in the first three years, then maybe. Spread over five, it starts to look less effective.

The bigger question is how the problem of "leakage" will be handled.  That is, how can we ensure that the EUR 35 billion in spending creates jobs in Greece rather than exports in Germany?  This is one of those things that would normally be accomplished via exchange rates.  (Oh, those again.)

Still, this paragraph is about as close as we can expect to a Eurozone confession that, "Yes, our entire approach to the macroeconomics of Greece has been completely wrong-headed from the start."

We celebrate the small victories, because they may be the only kind we get.  

Saturday, July 11, 2015

IMF: Most misleading sentence ever?

On June 26th -- the day before Greek Prime Minister Alexis Tsipras announced his intention to call a referendum on the Troika's proposed aid-and-conditions package -- the IMF caused a stir with the release of a preliminary draft of its Debt Sustainability Analysis (DSA) for Greece.  Press coverage focused, correctly, on two points.  First, the IMF found that, under then-prevailing conditions, the burden of Greece's debt was unsustainable.  Second, and arguably more important, was this:
If the program had been implemented as assumed, no further debt relief would have been needed under the agreed November 2012 framework.  (p. 1, boldface type in the original)
The press and others quite naturally interpreted this sentence to mean that the Greek government had failed to take certain specific, agreed-upon actions, and that, had Greece taken those actions, the results would clearly have made Greece's debt load sustainable.  I call this a natural interpretation because...well, because that is what it says.

But it turns out that this isn't what the IMF means at all.

The first clue that there is "creative wording" in play -- where "creative wording" is to "wording" as "creative accounting" is to "accounting" -- is in the first clause of the sentence.  Why, we might ask, does the IMF refer to the program not being "implemented as assumed," rather than "implemented as agreed?"  Is this just an awkwardly indirect way of saying the same thing, since the IMF assumed that Greece would implement the program as agreed?

Actually, no:  the use of the word "assumed" turns out to be crucial to real meaning of the sentence. Specifically, the assumptions in question go well beyond expectations of the Greek government's actions to include a series of jaw-droppingly unrealistic assumptions about what the results of those actions would be.  (Aside 1)

The next clue appears two pages later, where we find a subtly different version of the conclusion:
Taking into account all these background factors, if the key program targets had remained achievable, Greece’s medium-term debt profile would have improved by up to 13 percent of GDP. [...] No further relief would, therefore, have been needed under the November 2012 framework.  (p.3 emphasis added)
Leaving aside for the moment whether the program targets were ever "achievable," we still might wish the IMF would get its story straight.  Was the program not implemented, or did the program targets become unachievable?    (I suppose that one might argue that not achieving the impossible is a failure of implementation, if "achieve the impossible" is itself the extent of the plan. But the fault nevertheless seems to lie less with the execution and more with the plan -- and the plan's authors.)  

But enough of generalities and conclusions.  What can the IMF analysis tell us about the specific failures of reality to conform to plan?  For illustration, let's look at my favorite example -- an extreme case, perhaps, but characteristic of the sort of thinking underlying the IMF's program targets.

Perhaps the single greatest disappointment of the IMF's expectations has been the failure of billions of Euros to materialize from the sale of the Greek government's stake in various enterprises.
Over the course of the SBA and the EFF arrangement, receipts have consistently fallen short of program projections by huge margins. The fourth SBA review in July 2011 projected €50 billion to materialize through end–2015. Actual receipts through the first quarter of 2015 were €3.2 billion, about 94 percent below the target.  (p.8, Box 1)
Now, if the Greek government actually had something it could sell to private investors for €50 billion, its debts would certainly look a lot more sustainable.  But what could it be?  And how exactly did the IMF reach this valuation?  The June 26 analysis is actually rather revealing on this point, for we learn the following:
The projected privatization proceeds under the program were €23 billion over the 2014–22 period. Half of these proceeds were to come from privatizing state holdings of the banking sector.  (p. 4)
Let's spell that out:  the IMF expected the Greek government to realize €11.5 billion by selling its stake in Greek banks.  (Question for the reader:  what would you pay for an equity stake in the Greek banking system?  If your answer is €11.5 billion, please send me your contact information - or, to save time, just send your ATM card.)

In summary, when the IMF writes about the the failure to implement the program as assumed, this is the sort of thing is has in mind: the "failure" of the Greek government to find anyone willing to pay €11.5 billion for a stake in banks that require daily injections of liquidity from the ECB simply to keep the cash machines full.

Which brings us to the question in the title of this post.  When you, objective and informed as you undoubtedly are, read the page-one sentence cited at the beginning of this post (the one set in bold type, both here and in the IMF report itself) is this the sort of "implementation failure" that leaps to mind?  Or is the report's most widely cited single sentence also the most misleading sentence ever?

(Aside 1)  For those who have been following the IMF's work on this subject, this will undoubtedly feel quite familiar.  The obstinate refusal of the IMF's economic dreams to come true has been a recurring theme in every IMF analysis of Greece since the agency's original work of imaginative fiscal fiction in 2010.  Apparently, reality owes the IMF a very big apology.      

Thursday, July 9, 2015

Greece and the ECB: A Dialogue

Dramatis personae:

  • Alexis - a keen eyed observer of European stuff
  • Hans - a staunch defender of rectitude in all things
  • Porthos - an ordinary Greek fellow
  • Viktor - the worst central banker in the world

Alexis:  Has anyone noticed that the European Central Bank appears to be in the grip of fanaticism?  

Hans:  Strong words, but what could you possibly mean?  Surely the fanatics are the Greek -- or possibly German -- politicians.  You might disagree with the ECB's decisions, but that hardly justifies a charge of fanaticism.

Alexis:  Well, let's define our terms.  By fanaticism, I don't mean simply having strong views, strongly stated.   "Fanaticism," George Santayana wrote, "consists of redoubling your efforts when you have forgotten your aim."     By this definition, the European Central Bank (ECB) has lately been acting like a fanatic, and quite a dangerous one.

Hans:  Assuming I accept your definition, I still don't see your point.  The aim of the ECB is price stability.  I don't see hyperinflation anywhere in the Euro area.  

Alexis:  You may not be looking very hard; but let's set that to one side for the moment.  Your articulation of the ECB's aim is out of date.  

Hans:  Price stability is never out of date!

Alexis:  That's not what I mean.  In 2013, the ECB was given responsibilities beyond monetary policy and aims beyond price stability.

Hans:  Well, technically, I suppose.  The ECB is now the Euro area's official bank regulator.  But what's that got to do with anything?

Alexis:  And as the regulator of the Euro area banks, the ECB is charged with ensuring the stability of the financial system within each Member State.  (Note 1).

Hans:  I don't like where this is going.

Alexis:  Nor do I!  But I can't see any way to reconcile the legitimate aims and duties of the ECB with its decision to deliberately incite a banking panic in Greece.  

Hans:  Panic may be a bit of an overstatement.

Porthos:  Are you joking?  Do you know what we're doing to empty our bank accounts?  We're paying taxes!  Early!  (NY Times)

Hans:  OK, that sounds a little like panic.

Porthos:  We're dumping Euros as fast as we can in exchange for real goods -- refrigerators, washing machines, whatever we can get our hands on.

Alexis:  Sounds a little like hyperinflation, doesn't it?

Hans:  Ummm...

Alexis:  This may be the first time in history that a central bank has deliberately caused a panic in its own banking system.   And it's threatening to make things worse.  

Viktor:  Yes!  Does this mean I'm not the worst central banker in the world anymore?

Alexis:  Well...there's no evidence that you destroyed your own financial system on you've probably got a case.  

Hans:  But look -- none of this is the ECB's fault.  It's the Greek government's: its unwillingness (or perhaps inability) to pay its debts on time, its recklessness, its fecklessness, its...grrrr.  It makes me angry just thinking about it.

Alexis:  That may be part of the problem.

Hans:  There's no way to have a sound banking system without sound public finances.  The two go hand in hand.

Alexis:  Actually, that's one of the problems that the European banking union was created to solve. (Note 2, Note 3). The ECB is supposed to be breaking the links between the solvency of particular Member States and the banks operating within them, not strengthening them.  

Viktor:  So Mario Draghi is now the worst central banker in the world?  That is so cool!

Alexis:  Maybe.  But there's still time for the ECB to recover its wits and remember its actual legal mandates.  

Hans:  OK, blah blah blah mandates, blah blah blah financial stability.  Let's get real.  

Alexis:  I'm generally in favor of real -- what do you have in mind?

Hans:  The bottom line is this.  The Greek government is a sovereign debtor.  

Alexis:  Yes.

Hans:  And it is running a primary surplus.

Alexis:  More so than ever, if Porthos is right about the tax thing.

Hans:  Which means that the Greek government can simply stop paying its debt service any time it wants.  It doesn't need more money from creditors, and its creditors can't seize its assets.

Alexis:  Yes.  So?

Hans:  So?  So?  So the only leverage we've got to force Greece to pay up is the threat that we'll destroy its banking system and cause its economy to collapse completely.  Food riots -- that's the only thing those people understand.

Alexis:  Did you just say, "food riots?"

Hans:  Did I say that out loud?  Sorry.  Forget about it.

Alexis:  Gladly.  So, we're agreed that the ECB is a central bank, not the leg-breaker for a handful of creditor governments that have gone all loan-sharky?  

Hans:  But..the Greeks!  They're GETTING AWAY WITH IT!  That's JUST WRONG!

Alexis: That's debatable, but it's also beside the point.  A central bank isn't a comic book superhero, dispensing two-fisted justice.  It's an institution with a specific role to play within a framework of other institutions.  It is settled EU policy that a feckless or insolvent government should not lead to a financial panic or an economic collapse.  And the ECB is responsible for carrying out that policy, not for reversing it.  

Viktor:  Worst central banker ever!

Alexis:  Time will tell

Note 1:
The ECB should carry out the tasks conferred on it with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system of the Union as well as of individual participating Member States and the unity and integrity of the internal market, thereby ensuring also the protection of depositors and improving the functioning of the internal market, in accordance with the single rulebook for financial services in the Union. In particular the ECB should duly take into account the principles of equality and non-discrimination.  (EU 1024/2013 (30) emphasis added)

Note 2:
The stability of credit institutions is in many instances still closely linked to the Member State in which they are established. Doubts about the sustainability of public debt, economic growth prospects, and the viability of credit institutions have been creating negative, mutually reinforcing market trends. This may lead to risks to the viability of some credit institutions and to the stability of the financial system in the euro area and the Union as a whole, and may impose a heavy burden for already strained public finances of the Member States concerned.  (EU 1024/2013 (6) emphasis added)
Note 3:
 A single resolution fund (‘Fund’) is an essential element without which the SRM could not work properly. If the funding of resolution were to remain national in the longer term, the link between sovereigns and the banking sector would not be fully broken, and investors would continue to establish borrowing conditions according to the place of establishment of the banks rather than to their creditworthiness. The Fund should help to ensure a uniform administrative practice in the financing of resolution and to avoid the creation of obstacles for the exercise of fundamental freedoms or the distortion of competition in the internal market due to divergent national practices. The Fund should be financed by bank contributions raised at national level and should be pooled at Union level in accordance with an intergovernmental agreement on the transfer and progressive mutualisation of those contributions (the ‘Agreement’), thus increasing financial stability and limiting the link between the perceived fiscal position of individual Member States and the funding costs of banks and undertakings operating in those Member States. To further break that link, decisions taken within the SRM should not impinge on the fiscal responsibilities of the Member States. In that regard, only extraordinary public financial support should be considered to be an impingement on the budgetary sovereignty and fiscal responsibilities of the Member States. In particular, decisions that require the use of the Fund or of a deposit guarantee scheme should not be considered to impinge on the budgetary sovereignty or fiscal responsibilities of the Member States.  (EU 806/2014 (19) emphasis added)