Grexit will be the staggering cost of a non-independent central bank

THE European Central Bank (ECB) has decided to maintain its current level of emergency liquidity to Greece. By refusing to extend additional emergency liquidity, the ECB has decided that Greece must leave the eurozone. This may be a legal necessity or a political judgment call, or both. Anyway, it raises a host of unpleasant questions about the treatment of a member country and about the independence of the central bank.

As anticipated, the negotiations with Greece have led nowhere. As a result, Greece is bound to default on all maturing debts in the days and weeks to come. With a primary budget close to balance, the Greek government could have soldiered on until new negotiations about the unavoidable write-down of its debt.

The risk for the Greeks of this "default strategy" has always been that it depended entirely on the ECB's willingness to continue providing the Greek banking system with liquidity, especially at a time of a bank run by rational depositors who felt a non-zero risk of Grexit. Over the last weeks, the ECB has provided the needed liquidity in the face of a "slow-motion run" on Greek banks.