7.07.2015

Understanding Grexit: What is at Stake and What Happens Next

Grexit yes, Grexit no? That is the question. Now I feel fairly confident to predict what will happen next, following Sunday's referendum that led to a resounding 61 to 39 percent win for the "No" - meaning the Greek people overwhelmingly chose "no more austerity". 

There was one crucial move on Monday: would the European Central Bank (ECB) keep the Greek banking system on life support, maintaining emergency liquidity assistance (ELA) funding, yes or no? If it didn't, Greece would immediately collapse and the ECB would get the blame. 

The ECB, in line with Mario Draghi's cautious style, decided not to get the blame and extended ELA, capping it at the level of June 26 (that is €88.6 billion). That  gives breathing space to the Eurozone politicians to take their decisions.

Breathing space but not very much: a total of 48 hours; as I write now, that's more like 24 hours. On Wednesday, the ECB will review its decision after the Eurogroup and Eurosummit have met today.

Screenshot Source: to see the video click Bloomberg

So today, July 7,  is D-day for Europe and the Euro.

UPDATE:  Wrong prediction, I should have known European leaders would not meet their own deadlines, they never do. Now the decision-making calendar has been extended, Greece is presenting its proposals on Wednesday and the Eurosummit will meet again on Sunday to deliberate...We can no longer speak of D-Days in Europe, but of W-Weeks!

How is it likely to go? 

The logic of the situation is fairly obvious, this is like a game of chess: certain moves make sense and if the players are any good, they will make them. If the players are bad or stupid, they won't.

So far, over the past five months of negotiations, some players have proved a little better than others, like the IMF that has started talking about "debt sustainability" as a goal for the negotiations - technospeak for forgiving part of the debt (or extending maturity, which comes to the same thing) to lower it to a level that the Greeks can afford to pay without seeing their economy unwind. The players that have proved very bad are in the Eurogroup, the 18 Eurozone Finance Ministers facing Greece at the negotiation table.  

Led by the German finance minister  Wolfgang Schäuble whose understanding of economics appears singularly limited, they have shown themselves to be stupefyingly  insensitive to both the humanitarian and political dimension of the Greek situation. All they worry about is to come home free of any commitment to reduce the Greek debt  - a knee-jerk response to a conservative section of the European population - very large in Germany - that doesn't understand the stakes at hand, people who are only worried that they might have to "pay more taxes" and feel the profligate Greeks "deserve what they get", austerity and reform are the only way out.

As the Greek Debt Crisis Plays Out, a Similar Default Threatens One of the United States' territories: Puerto Rico

Is anyone witnessing a similar reaction among American citizens and Treasury officials to the news that Puerto Rico cannot pay its $72 billion debt? Of course not. 

But then the American dollar is a currency walking on two legs: a central bank (the Federal Reserve) and a Treasury. The Euro hobbles along on one leg only, the ECB.

There is no common Treasury for the Euro, the way it is for the American dollar. Small wonder the Euro's value dropped yesterday in currency markets. The Euro's "treasury", for better or for worse (and most likely for worse) is the Eurogroup.

What Greece is Likely to Bring to the Negotiation Table

I would be surprised if we are told by the press exactly what the Greek offer will be today. We will no doubt be shown in the course of the day how the Eurogroup finance ministers react to it - and this is not something anyone can foretell and I won't try to do it here. But I'm willing to bet that the blame game will start with a vengeance, with each one asserting he's "done his best" to save Greece from Grexit and that the fault for the negative outcome is entirely Greece's.

I wonder how they can honestly think we believe them? Our European leaders are definitely taking us for a ride. But the offer Greece will put on the table is easy to guess, it is necessarily shaped by the result of the referendum

To try and smooth the pill, Tsipras, the Greek Prime Minister, has changed Varoufakis, his finance minister judged to be too outspoken, the kind of person that doesn't fit into the Eurogroup ethos of ties and double-breasted suits. He's appointed  Euclid Tsakalotos, Varoufakis' deputy who, in spite of being Oxford-educated and soft-spoken, shares with him a love for motorcycles and backpacks.

Screenshot Source: RT
 He looks nice, but as Ms. Merkel said upon learning of the appointment, it doesn't change much to the fact that Greece needs to come with proposals.

So what are they going to be? Obviously a request for some form of debt relief - it is likely that an extension of the payment period from 20 years to 30 or 40 years will be on the table. And in return for debt relief, what will creditors get?  

Along with that request, and in line with the "no" vote, I am fairly certain Greece will decline to further pursue austerity and pension reforms that go against the mandate their electorate has given them. It will simply point to the referendum results and say it can't go down that road, full stop. 

UPDATE: I was wrong on one point: Greece backtracked on the pensions and allowed for some reform - in return for negotiating a larger bailout than the one they had originally pursued - some €53 billion - and opening up the chapter of writing off the debt, either through a "classical haircut" or through an extension of payment deadlines and lowering interests on the debt. And Tsipras got the agreement of the Greek Parliament to his proposals (see here). 

So what next? The creditors can:

(1) agree and let Greece off the hook - an unlikely outcome because if they do that with Greece, why not do the same for the other EU indebted countries, Portugal, Spain etc? And Germany likes to act tough and...damn any economic evidence that more austerity solves nothing - they want their money back, solidarity and cooperation are for others, not for Germany.

(2) disagree and show Greece the door, amounting to instant Grexit - an unlikely outcome even though the creditors may feel they have now safety valves in place that they didn't have five years ago, like the European Stability Mechanism and recent permission given to the ECB to pursue Federal Reserve-style Quantitative Easing policies that could contain any "domino effect" from a Grexit. The problem however is that those "safety valves" have never been tested and you could always have an effect like Prince Rupert's Drop (for an amazing video explaining this scientific mystery, click here) : a sudden, unexpected explosion - or rather, in this case, an implosion of the Euro and Eurozone economies. With untold consequences worldwide.

(3) disagree and slowly ease Greece out of the Euro: after all, the Greek economy only amounts to 2% of the total Eurozone wealth, a smooth easing should be technically possible - a progressive plan, step-by-step, maintaining the Greek banking system on life support while the Drachma is put into place, a process that would take a minimum of 6 months (my guess, anyone's guess welcome). This would allow Greece to follow Iceland's example, living on with a devalued Drachma that would support a spurt in exports and tourism. And presumably a return to a flourishing economy.

Option (3) could be the most likely - I prefer option (1). 

But in taking their decision, Euro creditors would do well to remember that their decisions are never entirely and only economic. 

They have fallout effects that could be deleterious to the survival of the Euro and more than that, to the very goal of European construction. Anyone remembers what a United Europe was supposed to be, the values of solidarity and fraternity it was supposed to entail? Watching the rise of nationalistic parties in Europe from Marine Le Pen to Beppe Grillo, one does wonder whether Europeans remember the atrocities of World War II and how close Europe came to the brink. So what are the stakes?

The Humanitarian and Political Stakes of a Grexit

A poorly managed Grexit could lead to a full-blown humanitarian crisis in Greece, with people literally going hungry and falling sick.

A poorly managed Grexit could cause Greece to fall in the arms of Russia and China. They are already knocking at the door, Russia with a gas pipeline, China with a foot in Greek ports, in particular the Piraeus, as the German magazine Spiegel recently documented (see here):



Is that what Europe wants?

PS: The French economist Piketty (best-selling author of Capital in the 21st Century) has the final word: 
- first, telling off the Germans and 
- next, proposing a conference on all of Europe's debt, just the way it was done after World War II. And do it in a spirit of solidarity, just as it was done then, when Germany's huge debt was forgiven, allowing for German post-war reconstruction. He concludes by noting:
Those who want to chase Greece out of the euro zone today will end up on the trash heap of history.
(Source:  interview on Die Zeit , click here

I couldn't agree more. And Ms. Merkel is decidedly among them. She continually insists on "respecting the sovereignty of every member of the European Union" - this is the exact equivalent of Charles de Gaulle's "Europe des Nations". De Gaulle never believed in a United Europe, his whole life was guided by a love for France and deep nationalism.

Mr. Merkel, the child of Eastern Germany, must have rejoiced when Germany was again re-united and she cannot see beyond Germany and German interest. For her, Europe does not exist and solidarity with our European brothers (like Greece) is an empty word. 


Ms. Merkel is a throwback to the past and a dangerous one. If she keeps going this way, she will destroy the European Project.


To share easily on Twitter, click this: 

Tweet: Europe vs. Greece: the #Euro's survival at stake, could endanger American + European recovery #GREXIT http://ctt.ec/76_ej+

One of the best analyses of the Greek situation by Yale Law professor Bruce Ackerman, published in the New York Times, a must read, click here.
Post a Comment