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Will Greece Stiff the European Central Bank?

The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.
Bloomberg
The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.

Earlier today, Alexis Tsipras—head of Greece's Syriza party (the one currently charged with forming a coalition government)—said that there should bea moratorium on Greek debt repayment.

The evil and stupid folks over at FT Alphaville* point out that most of Greece’s debt isn’t really due for repayment any time soon. The swapped debt in the private sector doesn’t come due until 2023. A moratorium on repaying that debt is a bit like telling a sleeping dog to lie down: the dog will do what you want, but it was already doing that anyway.

*(I don’t really regard FT Alphavillers as stupid or evil. I just wondered what it would feel like to sound like Paul Krugman. It feels awful. I’m sorry, lads and lasses. I take it all back.)

Greece could stiff the holders of foreign law bonds who didn’t convert into the new bonds. There are debt payments under these bonds coming due any day now. It could also stiff the IMF, which is due payment on funds provided under the “old” bailout sometime next year.

A more likely candidate, however, is probably the European Central Bank.

The ECB holds massive quantities of Greek government bonds that were not subject to the haircuts dictated to the private sector. Four different payments under the bonds are due this year. If you are looking for a candidate on whom to impose a moratorium, the ECB stands out.

What could the ECB do if Greece announced it was imposing a moratorium? It could stop providing liquidity to Greek banks, but that would both create a crisis and exact revenge on private banks for the actions of the government. Seems highly unlikely.

No real crisis occurs if Greece imposes a moratorium and the ECB does nothing. The ECB, after all, doesn’t need euros from Greece to finance its operations—it has as many euros as it wants. Most likely, the ECB would simply continue to provide liquidity to Greek banks while it attempted to end the moratorium through negotiations.

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