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One of the questions I left out concerns the possibility of creating a public bank (by integrating the 3 banks that are under public ownership now), endow it with publicly owned real estate, have it borrow money from the ECB at banking rates and lend it back to the Greek state at practically the same minimal rate. This is pretty much a tactical vehicle that brings about your "financing the Greek debt at the Frankfurt overnight rate" (and is what the Greek Coalition of the Left is proposing btw). Would that be more politically palatable / feasible?

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by talos (mihalis at gmail dot com) on Tue Apr 5th, 2011 at 09:48:13 PM EST
In the case of Ireland the Banks - most of which are now (or will shortly be) in public ownership - have €150 Billion in liquidity assistance funding from the ECB at the overnight rate. Given these banks lend on that money at much higher rates, this should be an immensely profitable activity for them. - and thus the taxpayer could ultimately benefit from this.  In addition, the last €24 Billion of public funding for the banks to recapitalise them post the stress tests may not be entirely lost provided those banks return to "profitability".

The problem with this scenario is that the problem has effectively been passed on to home owners who are heavily mortgaged (and in negative equity).  Should they start to return the keys in large numbers this will crystallise huge losses for the banks and further depress property prices. I'm not sure the stress tests really cover this doomsday scenario.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Apr 5th, 2011 at 10:03:20 PM EST
[ Parent ]
Yes, that would be a way to meet the demands outlined in the original letter (give or take a few unimportant details). But the ECB would have to rediscount the Greek sovereign bonds at virtually no haircut in order to make such a bank viable.

Whether the ECB rediscounts the Greek bonds directly or by proxy through the Greek central bank and via the purifying power of the bid-ask spread of a nominally private (but in reality government-controlled) bank is a matter of the most supreme indifference as far as the real economic impact is concerned. So if that is what it takes for the Austrianist chickenhawks at the ECB to save enough face for them to comply, then that's perfectly fine.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 6th, 2011 at 08:06:36 AM EST
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