Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem.

What is implies is that the Greek banks have for all intents and purposes already failed and the drain of cash out of Greece is impacting the current account balance. That is a process that should be stopped.

The charitable interpretation is that Bini Smaghi seems to be implying that the only eligible collateral the Greek banks have at this time is Greek debt, and were that to become worthless the Greek banks would lose access to ECB liquidity for that reason.

If either of these interpretations let alone both are correct, I think desperate corrective measures are needed, including a derogation of free movement of capital in and out of Greece. More than an outright ban, possibly a tax on outflows. This might allow Greece to restructure its banking sector without defaulting on the public debt. The situation might be hopeless, though, and then a default would follow after a complete collapse, whereas Bini Smaghi claims a collapse would follow a default.

On capital controls, see this post by Krugman and links therein.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:47:22 AM EST
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