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Greek Banks Remain Closed; Future of Greek Currency Uncertain

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In a popular referendum yesterday, Greeks voted to reject further European financial aid in exchange for more austerity. Despite promises to the contrary, Greek banks remain closed, allowing account holders to only withdraw a meager daily maximum of €60. Greek Finance Minister Yanis Varoufakis has resigned.

Greece will meet with its creditors tomorrow and try to negotiate for more debt relief and infusions of cash into its banks. Nobody is certain the course those negotiations may take, but one thing is for sure – Greek citizens are hurting as they remain cut off from their savings. Unfortunately, no matter which way those negotiations go, it appears inevitable that Greeks will continue to suffer financially.

Should negotiations with its creditors succeed, one proposed “solution” to Greece’s banking crisis is a “bail-in” of bank depositors, much like Cyprus in 2013. In that crisis, Cypriot bank accounts containing more than €100,000 had a portion of their excess savings seized. They essentially took money from the wealthy to shore-up all accounts.

However, a bail-in may be even worse in Greece. The Financial Times reports:

The plans, which call for a ‘haircut’ of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said…

“It would be implemented as part of a recapitalisation of Greek banks that would be agreed with the country’s creditors — the European Commission, International Monetary Fund and European Central Bank.”

A 30 percent tax on deposits of more than €8,000. This is not just a tax on the wealthy. This could be a devastating blow to the middle class and small businesses across Greece. In the meantime, there are hints that the €60 per day withdrawal limit may be lowered further.

On the other hand, debt negotiations could fall apart again. In which case, the Greek government is going to have to move quickly towards a different solution. This might mean dropping the euro and creating a new currency. Easier said than done.

An interesting article from Bloomberg lays out the difficulties of switching to a new currency, citing a variety of recent examples. The bottom line is that a new currency would probably be next to worthless, because there is a complete lack of confidence in the Greek economy.

Greece would be more complicated because the transition would have to happen fast, with little planning. And unlike most other currencies that have been abandoned, Greece’s current currency — the euro — will remain in circulation across Europe no matter what. That means any new currency might have little appeal to Greeks, who would expect its value to fall once the market was allowed to set the exchange rate.

‘As soon as anyone got new drachmas stuffed in their pockets, they would do whatever it takes to get rid of them,’ said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.”

Peter Schiff has argued that it is ultimately in Greece’s long-term best interest to abandon the euro currency. But this would require Greece to establish a more responsible budget and economic policy on its own terms. He doubts that’s likely, given the socialist tendencies of Prime Minister Alexis Tsipras.

Americans watching the Greek drama unfold would be wise to consider an important question. How have you protected your savings should a banking crisis of this magnitude reach our shores?

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6 thoughts on “Greek Banks Remain Closed; Future of Greek Currency Uncertain

  1. HenryR says:

    Truth be known, the EU has no way of ousting Greece from its membership. The Greek government owes European banks so much money that it amounts to roughly twice the worth of the European Central Bank. They have already broken the teeth of the IMF.

    The EU is made up of pirates in expensive suits who just happened to have acquired the rudiments of etiquette and know a little law. They are true blue looters and now they will loot Germany, the one remaining productive nation in their midst.

  2. casey says:

    Banks should write off 30% of Greeces debt and greek citizens should accept a 15% reduction in savings accounts over 8000 euro’s . Problem solved . The banks are already trillionaires and were complicate in plunging Greece into the Debt crisis its currently in. The banks can easily afford to write down Greec’s debt and the debt of every nation in europe without it affecting any bankers lifestyle . Its sickening to see the Banks prioritizing their own unimaginable wealth over the very life of Greek citizens . Greed , just unadulterated greed at work here !

    • HenryR says:

      I did not meant to suggest that the Greeks are completely innocent of wrong doing here, because they most decidedly are not, but the greater evil and wrongdoing lies with the the larger EU nations. They have created a stifling form of government that we would be at war with under any other circumstances.

  3. casey says:

    Banks should write off 30% of Greece’s debt and restructure with a new 30 year payment plan. and greek citizens should accept a 15% reduction in savings accounts over 8000 euro’s and operate with a balanced budget from here out . Problem solved . The banks are already Trillionaires and were complicite in plunging Greece into the Debt crisis its currently in. The banks can easily afford to write down Greece’s debt and the debt of every nation in Europe without it affecting any bankers lifestyle . Its sickening to see the Banks prioritizing their own unimaginable wealth over the very life of Greek citizens . Greed , just unadulterated greed at work here !

  4. James Eastman says:

    Let us not forget that Greek Government debt was just over 100% of GDP when the Global Recession hit in 2008, before running up to its present level of around 180% GDP on the back of unsustainable spending deficits. US Government debt is currently also around 100% of GDP. In other words, the United States is one recession away from the same fate as Greece. The US Government must move back into surplus and begin paying this down as soon as possible-this should be a national priority of even greater importance than combating ISIS. A good start would be doing as Romney proposed through removing entitlements-I do not understand how this plan did not get bi-partisan support.

    • HenryR says:

      That is a rather forlorn holpe considering our current crop of politicians. We should be planning on taking more personal measures and look after our own wealth rather than passively waiting on them.

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