WASHINGTON: Greece is finding out that you can’t have an economy without banks, and that you can’t have banks without an economy, either. Or at least one where businesses aren’t allowed to buy the things they need to stay in business.

Now, Greece’s banks, through no fault of their own, have run afoul of a little-known rule: “Never set up shop in a country that’s been forced into mega-austerity and capital controls as a result of the currency union it’s a part of.”

In other words, they didn’t lend money to people they shouldn’t have or lose money on their own bad bets. Greece’s banks just made the mistake of being banks in Greece.

Part of it is the fear that Greece will get kicked out of the common currency and that everyone’s euros will get turned into drachmas that aren’t worth anywhere near as much. That has set off a slow-motion bank run — a bank jog, really — that picked up speed in the past few months when it seemed that there might not actually be a bailout deal.

But that was a manageable problem as long as the European Central Bank did its job as a lender of last resort and lent Greece’s banks cash in return for hard-to-sell assets.

The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good. Not only that, but the government also has had to prevent people from moving their money out of the country — what economists call capital controls — so that the run on the banks wouldn’t turn into a run on Greece.

It’s only a slight exaggeration to say that this has made Greece go from having not much of an economy to having not one at all. Greek companies haven’t been able to pay foreign suppliers because they can’t send money out of the country, so their factories have run out of supplies.

Everything has come to a standstill. Greece’s purchasing managers index, which measures manufacturing activity, just collapsed from a sickly 46.9 to a deathly 30.2. Anything less than 50 means that the manufacturing sector is shrinking.

That, in turn, means that Greek businesses that should have been able to pay back what they owed won’t be able to do so. And so the Greek banks that lent them money — which, at the time, was a perfectly reasonable thing to do — are in line for more loss. How much more?

Well, enough that their stocks have fallen by the maximum 30 per cent almost every day since the country’s markets reopened. Add it all up, and Greece’s four biggest banks have plunged between 80 and 90pc since last October. At this rate, it won’t be long until they need the 10 billion- to 25 billion-euro bailout that Greece’s creditors think it will take to recapitalise them.

This is a reminder of the high economic cost Greece has paid for not even no gain, but actually a loss.

Greece’s ruling party, Syriza, thought it could win better bailout terms by playing a game of chicken in which it all but threatened to stop using the euro despite the fact that it had no intention of doing so. It was wrong.

The problem was that, for Germany at least, this wasn’t so much a threat as an opportunity. Berlin proposed, in the most condescending terms possible, that Greece take a five-year “timeout” from the common currency. (No word on whether Greece would have to turn and face the wall as well).

The result was that Syriza incurred a lot of the costs of giving up the euro, such as a financial crisis, while keeping the costs of staying in the euro, such as austerity. Even that understates what a disaster the experience has been. Greece ultimately had to agree to harsher terms, which have increased the costs of keeping the euro.

If Cyprus’s experience with capital controls is any guide, it will be years before Greece will be able to lift its controls, thus weighing down an already weak economy even more.

The only consolation is that Greece’s banks can’t fall below zero.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, August 9th, 2015

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