By Tim Worstall, Forbes
We’ve a warning in the British papers this morning that travelers to Greece should make sure that they carry some cash money with them. Cash as well as debit and or credit cards, as there’s a possibility that the Greek banks might turn off the ATM machines.
It should be said that this is actually a possibility but it’s still something of a remote one. If the Greek banks do end up doing that then that would be a sign that the current debt negotiations have been grossly mishandled. To the point that Greece is engaged in an unplanned and not necessary exit from the euro. And while that is a possibility, indeed the one that I think is the most likely form of Grexit (although not at all the most likely outcome from the whole process) it’s still not likely in the overall scheme of things. But this really is the advice that’s being handed out over here:
Holidaymakers to Greece are being advised to take euros in notes and coins in case an escalating debt crisis prompts the country’s banks to switch off their cash machines.
The Greek tourist board in London said that while it anticipated no immediate problems, visitors should avoid relying solely on credit cards or local ATMs.
Travellers should take “enough money to cover emergencies and any unexpected delays”, the Foreign & Commonwealth Office added. Travel experts recommended taking around three to five days’ worth of spending money in euros, alongside credit and debit cards.
Then again, there are travel experts who say you should always take a few days cash with you anyway, just in case something else happens: anything from a power cut to being stuck in an airport where everyone else has drained the ATMs can lead to a need for cash.
In the background here though there is a real and actual worry. We all know that Greece has the huge debt burden and they’re struggling to be able to repay it. OK, there might be some out there who don’t know this but they’re not likely to be reading Forbes really. And there’s various ways in which this debt burden can be dealt with which is what is being discussed in all these meetings between the Eurogroup (the people the money is generally owed to) and the Syriza led Greek government. Essentially, there could be a write off of the debt, Greece could run a large primary budget surplus for a few decades and pay it off or the terms of the debt could be changed to make the burden, while seemingly the same, less onerous in actuality. The negotiations are really about which mixture of these three is going to happen. Syriza wants a cut in the burden and only a small, not large, primary surplus, the Eurogroup would probably accept a change in the terms but not a change in the surplus or the burden itself. Thus the difficulty of the negotiations.
In the background there’s the simplicity of default. The negotiations don’t end up going anywhere and so Greece simply declares that it cannot pay those debts. End of. It’s what happens next that affects the banks. For they are being kept alive by a special form of lending from the ECB, the so called “ELA”. If they don’t get that then they’ve got no euros to put into the ATMs. and the Greek government doesn’t have the power to print more euros (neither physically, although it has a printing press it’s not allowed to print more) or electronically. So, if Greece defaults, and one of the people it could default to would be the ECB itself, does the ECB go on lending to the Greek banks or not?
Here it all gets a bit tricky. Formally, the E in ELA stands for “emergency”. This means that it can be used to cover liquidity issues but not solvency ones. And the Greek banks would be insolvent in the event of a default. So, according to one reading of the rules the ECB should cut off the banks at that point. But another reading says that the ECB can do pretty much whatever it wants to preserve the euro as a system. Meaning that it can over ride that emergency bit if it wishes.
The end result of all of this is that the Greek ATMs closing down is a conceivable part of the end game. I would certainly, if I were to travel to Greece, make sure I did have some of that cash about me. But while this is conceivable it’s still a long, long way from being likely or even probable.
