No! Whats Next?

The Greeks have said “No” to the European austerity package. The outcome of this decision will take a while to emerge.

The European governments hold €300 billion of Greek government debt. However, they hold no security over this debt. The main way they can pressure Greece is for the European Central Bank to withhold emergency liquidity funding from the Greek banking system. The ECB cut these funds off this last week, which shut the banks. The ECB could destroy the Greek banking by refusing to restore liquidity support. This would look odd, because it would be refusing to do what central banks are mandated to do: be a lender of last resort.

If the ECB fails to support the Greek Banks they will quickly collapse. This would create serious problems for the economy, as businesses would find it very difficult to operate with no facility for buying inputs or paying wages and salaries. The Greeks would have to find some another way of getting payments working.

The Greek government is suggesting it could establish a parallel currency by issuing electronic IOUs. Some businesses are already creating notes that their staff can give supermarkets to get food, then supplying good to the supermarkets to compensate. I have explained how local communities can create an alternative banking system in Community Banks.

The other way the Europeans can pressure Greece is to withhold further loans. The Greek government cannot operate through a serious recession without further borrowing. If it does not get more loan funding, the government will be out of money. It would not be able to afford to pay pensions and salaries of the public service. This would leave many people without income and unable to pay rent or buy food. It might make it very difficult for hospitals and police services to keep operating. The Greeks would have to find ways to new ways to support each other through this crisis with giving and sharing. If things got really bad, international aid agencies might need to provide food aid. Russia, China and US Hedge Funds are possible sources of loans, if there were a complete default.

These problems are unlikely to happen. I suspect that European and Greek politicians will arrive at a negotiated solution and the situation in Greece will grind on for a long time.