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The Greek Coup: Liquidity as a Weapon of Coercion
Posted on Aug 2, 2015
By Ellen Brown, Web of Debt
This piece first appeared at Web of Debt.
In the modern global banking system, all banks need a credit line with the central bank in order to be part of the payments system. Choking off that credit line was a form of blackmail the Greek government couldn’t refuse.
Former Greek finance minister Yanis Varoufakis is now being charged with treason for exploring the possibility of an alternative payment system in the event of a Greek exit from the euro. The irony of it all was underscored by Raúl Ilargi Meijer, who opined in a July 27th blog:
So how was that coup pulled off? The answer seems to be through extortion. The European Central Bank threatened to turn off the liquidity that all banks – even solvent ones – need to maintain their day-to-day accounting balances. That threat was made good in the run-up to the Greek referendum, when the ECB did turn off the liquidity tap and Greek banks had to close their doors. Businesses were left without supplies and pensioners without food. How was that apparently criminal act justified? Here is the rather tortured reasoning of ECB President Mario Draghi at a press conference on July 16:
In a July 23rd post on Naked Capitalism, Nathan Tankus calls this “a truly shocking statement.” Why? Because all banks rely on their central banks to settle payments with other banks. “If the smooth functioning of the payments system is defined as the ability of depository institutions to clear payments,” says Tankus, “the central bank must ensure that settlement balances are available at some price.”
How the Payments System Works
The role of the central bank in the payments system is explained by the Bank for International Settlements like this:
Internationally before 1971, this “settlement asset” was gold. Later, it became electronic “settlement balances” or “reserves” maintained at the central bank. Today, when money travels by check from Bank A to Bank B, the central bank settles the transfer simply by adjusting the banks’ respective reserve balances, subtracting from one and adding to the other.
Checks continue to fly back and forth all day. If a bank’s reserve account comes up short at the end of the day, the central bank treats it as an automatic overdraft in the bank’s reserve account, effectively lending the bank the money in the form of electronic “liquidity” until the overdraft can be cleared. The bank can cure the deficit by attracting new deposits or by borrowing from another bank with excess reserves; and if the whole system is short of reserves, the central bank creates more to maintain the liquidity of the system.
The most dramatic exercise of this liquidity function was seen after the banking crisis of 2008, when credit was frozen and banks had largely stopped lending to each other. The US Federal Reserve then stepped in and advanced over $16 trillion to financial institutions through the TAF (Term Asset Facility), the TALF (Term Asset-backed Securities Loan Facility), and similar facilities, at near-zero interest. Toxic unmarketable assets were converted into “good collateral” so the banks could remain solvent and keep their doors open.
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