Currency Brinksmanship: The Parallels
As Yanis Varoufakis, the Greek Finance Minister, heads for talks with other Eurozone finance ministers billed as a “showdown”, it’s interesting to reflect on the parallels with last year’s Scottish referendum. In both cases we saw the leaders of relatively small European countries trying to negotiate economic terms with larger entities. In the Greek case, this is the ‘troika’ of the European Commission, European Central Bank (ECB) and the International Monetary Fund. For Scotland, this was the UK and, at some remove, the European Commission. In both cases, a currency union was at stake: for Greece, the existing Eurozone; for Scotland, a proposed ‘sterling zone’. And in both cases the dialogue has essentially consisted of the smaller entities setting out ambitious demands and the larger entities responding negatively.
So what has been the outcome? Well, in both cases capital flight has been prevalent. In Greece’s case, billions of euros have moved out of the country since the radical Syriza party were elected on 25 January. In Scotland’s case, in the absence of official figures the evidence of capital flight is anecdotal but widespread. It is surprising how many people have quietly admitted they moved their money south as the referendum got closer.
For Greece, the brinksmanship is coming to a head. Bank liquidity is already under severe pressure now the ECB has ceased accepting Greek government bonds as collateral. The yields on these bonds are climbing so high the Greek central bank has stopped posting official bond prices and yields. The 3-year bond is now paying above 18%; the UK’s 3-year bond rate is 0.69%. The next few days and weeks will prove crucial.
© Patrick Macdonald 2015