A drastic haircut for Greek middle-class as savers are set to lose 30% of their deposits over €8,000

The Greek problem is very complicated I am told. It is an ideological battle between right and left, I also read. It is austerity versus profligacy. But I think it has been unnecessarily “complexified”. It is not about which ideological gods are to be worshipped but it is about good house-keeping. It is essentially, basic “home economics” applied to a household of 11 million people. It is about how a deeply indebted household with expensive habits and many non-contributing members is to continue. It is about what lenders are justified in demanding from the household to continue lending. It is about abdication of responsibility by the householder. It is about lending to a prudent householder or to one who will neither clean his house or commit to good house-keeping.

Whichever way it goes at the referendum tomorrow, there is going to be a great deal of pain for the “middle class” who have paid their taxes and have managed to save and who keep their savings in Greek banks. Those who don’t usually pay their taxes (and I have seen one estimate that these are around one third of those who should be paying taxes), keep the “black” economy thriving and they don’t usually bother with banks. The visible rich probably pay a significant amount of the taxes they should but they keep their money mainly outside of Greece (but probably in the Eurozone or in dollars). Since Tsipras came to power they have been quietly getting out of the Greek banks. They are well aware of how all depositors in Cyprus had their savings in Cypriot banks arbitrarily written down over one day while the banks were closed. The very rich of course are well versed in all methods of tax evasion and they are not so stupid as to have kept their money as deposits with the Greek banks.

The total Greek debt is about €328 billion which is about €30,000 per capita. In theory if €30,000 could be confiscated from every Greek citizen, Greece could be debt free. Of course if creditors accept that some level of debt write-down is inevitable – and this seems unavoidable – they will certainly insist that Greece and its banks also accept a “haircut”. The question becomes how much debt write-down is necessary and how much of that will be confiscated by those with substantial deposits in Greek banks. If the IMF analysis is to believed (and they have been wrong many times) then the debt must be reduced by around €60 billion for a growing(?) Greek economy to have a chance of servicing the remaining debt.

Yesterday a report in the Financial Times (since vehemently denied by Syriza) stated that a swingeing 30% of all deposits over €8,000 would be confiscated. As a comparison the Cypriot haircut finally became a dissolution of Laiki Bank and the confiscation (with part conversion to equity) of 47.5% of all deposits above 100,000 euros in the Bank of Cyprus. There are not enough deposits at Greek banks of over €100,000 to milk and hence the figure of €8,000 seems credible.

The critical point is how much debt can 30% of these deposits wipe out. Suppose the lenders agree to write-off (or write down) debts equivalent to about €30 billion. Then Greek savers would need to cough up an equivalent amount if the IMF target of €60 million is to be reached. That is about €3,000 per capita. Greece has an average monthly wage of about €1000 per month (2014). Of course unemployment is high and it is not the average wage earner who exhibited the profligacy or evaded taxes which created the Greek debt mountain. From Syriza’s perspective, confiscating the money of the rich would be best for this purpose. But since that may not be within reach, it is better to soak the middle-class than the bulk of their supporters who are average wage earners or unemployed.

So whichever way it goes in the referendum tomorrow, the middle-class in Greece are going to get badly hit. They are in for a full Brazilian wax job and not just a neat short back-and-sides.

 

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