The Greek Coup: Liquidity As A Weapon Of Coercion

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:

One of the principal functions of central banks is to be the guardian of public confidence in money, and this confidence depends crucially on the ability of economic agents to transmit money and financial instruments smoothly and securely through payment and settlement systems. . . . [C]entral banks provide a safe settlement asset and in most cases they operate systems which allow for the transfer of that settlement asset.

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.

Liquidity as a Tool of Coercion

That is how the Fed sees its role, but the ECB evidently has other ideas about this liquidity tool. Whether a country’s banks are allowed to “access monetary policy operations” is seen by the ECB not as mandatory but as discretionary with the central bank. And as a condition of that access, if a country’s bonds are “below investment grade,” the country must be under an IMF program — meaning it must subject itself to forced austerity measures. According to ECB Vice President Constâncio at the same press conference:

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Ellen Brown is an attorney, founder of the Public ...

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Freto 5 years ago Member's comment

You could call it a form of blackmail but was it not just a precursor to what a grexit would look like? The EU wasn't interested in negotiating, it was in or out & the new government blinked. They should have left the EU currency. They would get their debt relief as they would default on everything like Iceland. It would have been best for both parties & maybe it would help disband the abomination called the euro. The greeks [at least their government & probably half the country] were gutless. Get off the tit.

Stephan Larose 5 years ago Member's comment

Banks as citizen-owned public utilities. Good idea!