I would say that the Greek banks are insolvent and that, in its heart of hearts, the ECB knows that this is the case -- rather than the pretense that it is a "liquidity problem". The FT refers to "dynamic balance sheet assumption", which is a flashy way of referring to monies that the Greek banks say is worth 'x' but which most accountants would say is worth the rather lower 'y'. But let's take the Hellwig line. There seem to me to be two lines - both flawed. 1) The Greek banks maintain that the money that they are owed is worth significantly more than what prudent accounting says it is worth. Now, this is, admittedly, a judgement call. First you have to assess the chance that you will be paid what you are owed, and also you have to assess the value of the collateral posted in case the loan is not repaid. It is I think the second part where Hellwig and Sinn seem to part company. It would take me a day or so to go through the available figures (the Greek banks are also not overly transparent in some places, which makes judgment even harder) and that's not something I feel like doing without being paid so to do. But this is the basis of the disagreement. 2) Hellwig argues that, if people were willing to fund Greek banks, things must have been fine within the Greek banks. I see this as no argument at all. There are a number of reasons that funding could have continued even though the banks were insolvent. Kahneman's analysis on risk-taking covers this. "Throwing good money after bad" (see the Nigerian 419 scam as a great exploiter of this) and "emotional involvement" (an unwillingness to realize one's losses) would all explain continued faulty lending.
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Re: confused by ELA and economists commentary
Date: 2015-07-09 11:53 am (UTC)The FT refers to "dynamic balance sheet assumption", which is a flashy way of referring to monies that the Greek banks say is worth 'x' but which most accountants would say is worth the rather lower 'y'.
But let's take the Hellwig line. There seem to me to be two lines - both flawed.
1) The Greek banks maintain that the money that they are owed is worth significantly more than what prudent accounting says it is worth. Now, this is, admittedly, a judgement call. First you have to assess the chance that you will be paid what you are owed, and also you have to assess the value of the collateral posted in case the loan is not repaid. It is I think the second part where Hellwig and Sinn seem to part company. It would take me a day or so to go through the available figures (the Greek banks are also not overly transparent in some places, which makes judgment even harder) and that's not something I feel like doing without being paid so to do. But this is the basis of the disagreement.
2) Hellwig argues that, if people were willing to fund Greek banks, things must have been fine within the Greek banks. I see this as no argument at all. There are a number of reasons that funding could have continued even though the banks were insolvent. Kahneman's analysis on risk-taking covers this. "Throwing good money after bad" (see the Nigerian 419 scam as a great exploiter of this) and "emotional involvement" (an unwillingness to realize one's losses) would all explain continued faulty lending.