MUNICH – Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.
Plan B comprises two key elements. First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone.
Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.
Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.
Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.
A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.
A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.
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