More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly. — Woody Allen _
In times like these, your humble blogger finds it his duty to state the obvious:
1) Greece is being kicked out of the euro.
_2) Greek banks will never re-open to freely dispense euros.
_3) Greece will re-introduce the drachma or the equivalent.
_4) Greece will become the Argentina of Europe.
The “referendum” and everything else is just a blame game, a Kabuki theater to make the inevitable outcome politically palatable and pin responsibility on the other side.
Of course, the people doing the kicking are not going to say this, exactly. And your bank economist, journalist or other professional talking head points this out at the risk of potentially making people mad and burning relationships.
1) Why do I say Greece is being thrown out?
Merkel pretty much calls the shots in Germany and on the euro. But she is not all-powerful. She has an EU coalition to keep together. She has a good-guy/bad-guy act going on with Schäuble. How much she uses him as her tough guy goon to do her dirty work, and how much he controls her by being the only one who can provide political cover for compromise, is open to question.
Exhibit 1: Schäuble told Geithner “there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy.”
Exhibit 2: The Charlie Brown-like moving of the football. Tsipras attempted an honorable surrender, proposing a deal everyone said was a good starting point, but where he could go back to his coalition and honestly say, this is the best we could possibly get. Instead of a constructive counter-offer, he got an ultimatum which would have been political suicide for him to accept. And Schäuble said he wasn’t even on board: “he saw little chance that he could get it past the German Bundestag.” If Schäuble and Merkel want it to get through the Bundestag, it gets through the Bundestag. That set the stage for a potential appeal to Merkel and showdown with Schäuble, leaving the door open to another moving of the goalposts if it was accepted. Schäuble and the Eurogroup are stupid (in the way all political bodies are collectively stupid), but they are not that stupid. The whole point was to make an offer Tsipras couldn’t accept, but which he could then be blamed for not accepting. (Seriously, go read it. It’s nuts. Even assuming it’s a self-serving leak from the Greek side.)
Exhibit 3: Schäuble: ‘No new bailout unless Tsipras goes.’ It’s an anonymous source, but a male German conservative, and “one of Europe’s most influential politicians.” Come on. No one other than Schäuble can be heard on this subject authoritatively and be described in this fashion, and if it’s not intended to send a message, it needs a prompt denial, which has not been forthcoming.
Greece is being thrown out by the euro zone, led by Schäuble, with the acquiescence of Merkel, Draghi and the rest.
Why is Greece being thrown out? I am hardly without sympathy for Merkel and the Germans. Greece should probably never have been in the euro. They fudged the numbers to be eligible to join. They borrowed excessively and fudged the numbers more to keep borrowing. Of course, they were much aided by being able to borrow in euros at a few hundred basis points over German debt, from German and French banks that were happy to lend large amounts at a high yield with a zero risk weighting.
Austerity is the price Greece has to pay. It’s just the way the euro is set up. In rough numbers, they got €100b of official financing to tide them over and a ton of technical support/political cover to enforce reforms. If it was working there would be a lot of pain and then a recovery. It’s not working. Tsipras can’t be trusted to be given a check and reform on his own. It’s politically untenable to monitor them forever, primarily for Greeks but even in Germany. It leads to painting Germans as occupying Nazis, tax evasion and backsliding. Never mind what it means for the parts of the Eurozone at risk of turning right because they don’t want to bail out Greeks, or turning left because they want to be bailed out like the Greeks. At some point, you have to cut the cord.
Tsipras wanted something politically different from what the eurozone is set up to be, i.e. a transfer union. Whether the euro can survive and prosper without being a transfer union, in the presence of inevitable economic and capital flow imbalances, is an open question. Even Draghi has said the eurozone has not met ‘minimum requirements’ to be a stable currency union where members are better off inside than outside. But politically, subsidizing Greeks is anathema to Merkel’s German constituents.
That being said, it’s a travesty to demand another several percent of GDP of austerity when there is 25% unemployment. It’s a travesty to refuse to entertain conditions for a debt haircut and negotiated bankruptcy when the debt is clearly unsustainable. It’s shockingly rough justice and a disgrace to throw a European partner to the wolves and make it a whipping boy and pariah to the point of turning into a potential failed state. And for what? The Greeks don’t need another big cash infusion because they’re in fiscal balance, this is about interest payments and conditions on the previous bailout. And of course, the financial costs of Grexit probably make the cost of any deal look like chump change. Not just for the Greeks, whose economy will completely collapse in the short term, but for the creditors, who won’t be able to get their money back from the impoverished Greeks.
The ultimatum was an offer Tsipras could only refuse. The “referendum” is his choice to trigger Grexit, while attempting to pin the blame on the eurozone for failing to support a democratic choice. Tsipras’s subsequent offer to accept all eurozone conditions with modest changes (an offer the euro zone cannot accept in the face of a referendum on Grexit), and repeated requests for bailout funds, can also be seen as simply attempts to put the onus on them for the inevitable Grexit.
2) Why will Greek banks never re-open?
The referendum call could only trigger a full-fledged bank run, since there is reasonable doubt about remaining in the eurozone. Once there is a bank run, the only thing that stops it is 100% backing by the ECB. And the ECB, while not a political organization, cannot go and send further tens of billions to Greece against the will of the eurozone member governments who appoint its board. And it is not their will to have Greece in the euro under these circumstances. Even if they weren’t throwing Greece out, it would hardly make sense for the ECB and eurozone to send further billions that could not be repaid if the Greeks themselves may not want to stay in the eurozone.
Once the financial system is shut down and capital controls instituted, it is non-trivial to restart it and lift controls. The only thing that will restart it is a “Yes” vote, a political deal, and 100% backing by the ECB, including unlimited provision of euro credit.
Without those three things, Greece can’t remain in the eurozone. Any remaining threat to the banking system causes everyone to withdraw their funds. Any remaining threat of capital controls or leaving the euro causes everyone to try to move the entirety of the country’s stock of euros beyond the reach of redenomination or bail-in. There just won’t be any euros around to run an economy.
Nothing short of ‘shock and awe’ and 100% backing by the ECB and eurozone restores a functioning payments system, and you can’t have a functioning economy without it.
3) How will Greece re-introduce the drachma or equivalent?
[edited] I’m on thin ice here, but one way is:
1) Direct Bank of Greece to keep printing euros, but overstamp “Hellenic Republic internal use only, not recognized by the ECB.”
2) Existing deposits can only be withdrawn as “Greek euros” a/k/a “g-euros” a/k/a “gyros” (get it?). Those Greek euros will of course trade at a big discount, representing a haircut.
3) Pass legislation forcing “Greek euros” to be accepted in settlement of some or all types of debts and contracts.
4) Inject “Greek euro” capital into banks as necessary.
5) After suitable preparation six months from now, swap “Greek euros” for drachmas.
One would presume this goes against Greek laws and EU treaties. It would presumably require some kind of totalitarian emergency and suspension of laws. Presumably European courts would declare it illegal, but it’s not clear they could do anything about it. It’s also unclear if Tsipras has the kind of support to go full dictator. The security forces seem to lean more neo-Nazi than Tsipras.
Even if redenomination is run competently, it will be a nightmare. If it’s not run competently, it will mean massive inflation or cash shortages. And this thought experiment shows how it can lead to seizing of totalitarian powers, civil war, conflict with the rest of the EU.
4) Greece will become the Argentina of Europe.
Eventually, Greece could recover under a new currency, as tourism becomes ultra-cheap, they can ramp up exports of feta cheese and yogurt and olive oil and compete with e.g. Turkey for light manufacturing. But that takes time, and in the short run they can’t import what they need to live without credit: food and energy, medical supplies. And amid chaos, tourists don’t come, and you can’t ramp up production.
If you had your euros or assets overseas, you’re in good shape. If you had debts in euros, local deposits, lose your job etc., you are ruined. The government may attempt to seize/tax overseas assets, nationalize companies, who knows what. The new currency will need to find its level, and there may be massive inflation. Greece is politically divided, and there will be political unrest. Let’s hope there is no civil war with gunships strafing demonstrators, or a Falklands in Cyprus.
Best case, Greece will be an economic and political basket case, saddled with penalty terms in international dealings.
So, to state the obvious, these are the choices facing Greek voters on Sunday:
No: Redenomination. Go to Grexit immediately.
Yes: Capitulation. Go to Grexit eventually.
If I had to guess, a “Yes” vote would lead to Tsipras’s exit stage left, and a national unity government or new elections. But nothing, not even abject capitulation, will ever lead to the unconditional backing that is needed for a stable financial system and recovery. You’ll get a technocratic government, a banking system on a short leash with everyone hoarding euros and holding their breath, no relaxation of austerity, possible moving of the goal posts. And eventually even a center right coalition will be forced to commit political suicide or trigger Grexit.
The magic is gone out of the marriage, and the eurozone and the Greeks are like spouses for whom nothing the other does is ever good enough. And once the plates start flying and divorce lawyers are involved you can’t really put things back together the way they were. The knowledge that divorce is financially catastrophic and harmful to the children enters into the equation, but is not necessarily dispositive.
If the eurozone really wanted the Greeks to stay in, they would, at a minimum, point out the that “No” means the catastrophe of Grexit, and hold out an olive branch for a “Yes” vote in the form of parameters and a timeline for debt relief. An ultimatum accompanied by an inept and patronizing defense of the “Yes” is just telegraphing their true feelings: it’s over.
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses and all the king’s men
Couldn’t put Humpty together again. — Lewis Carroll
An alternative theory: Merkel/Schäuble are not throwing out Greece, they’re throwing out Tsipras, like Papandreou and Berlusconi before him. The Merkel/Schäuble plan is, squeeze Greece until Tsipras is forced to accept defeat or be thrown out by the Greeks. Then throw a bone to his successor and proceed with just enough loosening of austerity to keep Grexit at bay. The main thing this theory has going for it is, it’s risky, but rational if you think you can pull it off — in contrast to Grexit, where the Greek economy collapses, and the creditors don’t get paid back. The problem with this theory is, it’s hard to see Merkel/Schäuble being able to foresee a Tsipras exit and ability to restart the program. By the time Tsipras is out, the damage to the Greek economy and financial system will be a sunk cost, and Grexit would seem a potentially better alternative for the Greeks. Another problem with this theory is the austerians have been practically campaigning for Greeks to vote “No” for Grexit. The simplest explanation is best: there wasn’t political space for a deal, so they chose to push Greece out, and everything else is a blame game. Sufficiently advanced brinksmanship is indistinguishable from self-destruction. Possibly bungling played a role, but I don’t believe in coincidences or Graccidents.