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Greeks Bearing Debts
Greece and Europe Stumble Towards A Precipice

After dismissing earlier reports as scurrilous rumors, Greek Deputy Prime Minister Yannis Dragasakis openly admitted that snap elections are in fact a possibility if negotiations fail to secure an accord to release bailout funds later this week at the EU summit in Riga. He ruled out his government crossing “red lines that we have set” in negotiations with EU stakeholders, presumably referring to Syriza’s election commitments to roll back austerity measures. EU leaders are frustrated with lack of visible progress on reforming Greece’s pension system and labor market—measures that the previous government agreed to in 2012, but which Syriza seems unwilling to implement. If snap elections are being considered, even “in the backs of our minds” as Dragasakis says, then a meaningful compromise over reforms really may not be achievable.

Does that mean Grexit is inevitable? Wolfgang Münchau of the FT writes that some euro officials think not, and are contemplating various scenarios—like letting Greece default inside the eurozone. Here’s how Münchau says it could work:

[Greece could] default on the IMF and the European Central Bank. The IMF is expecting a series of repayments. The ECB wants its money back in the next few months on debt it holds on its books. Defaulting on the IMF and ECB is the only option that would bring genuine financial relief in the short term. Nobody has ever done that. It might trigger Grexit.

Then again, it might not. Default is not synonymous with exit. There is no EU ruling that says you have to leave the eurozone when you default on your debt. The link between default and exit is indirect; if a country defaults, its defaulting securities are no longer eligible as IOUs for the country’s banks to tender at ECB money auctions. The same applies to any other debt guaranteed by Athens. The Greek banks hold quite a bit of the latter category, and might find it hard to obtain liquidity if their government falters.

So to default “inside the eurozone” one only needs to devise another way to keep the banking system afloat. If someone could concoct a brilliant answer, there would be no need for Grexit.

Therein lies the rub, of course. Keeping the Greek banking system afloat without helping the profligate Greek government still would amount to a kind of partial bailout—something that in today’s political atmosphere would be a hard sell. With euroskeptic parties ascendant across the continent (the True Finns are in negotiations to enter the Finnish government, having come in second place after the winning Centre party in recent elections) and with publics increasingly wary of Greek free-riding in places like Germany, an opaque deal that kicks the can further down the road—a Eurocrat specialty for the past several years running—may prove difficult to pull off.

We will have to see, of course. Maybe these unnamed European officials know something we don’t, or have a spectacularly detailed contingency plan drawn up to navigate what is likely to be a very complicated situation. Or, as Munchau himself despairs, maybe they don’t, and Europe is blindly barreling headlong into what could be a very messy divorce with its Greek partners.

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  • Anthony
  • Andrew Allison

    The current Greek government has made it abundantly clear that it’s not going to implement the reforms demanded by the only feasible source of new debt, and the Greek people are not going to vote for a government promising to implement the necessary reforms. Ergo, the only reason to call a snap election is to try and get an extension of the payment deadlines until after the election. The question, as it has been throughout, is to what lengths the Troika will go to avoid having to acknowledge that the Greek debt is worthless. Incidentally, since no mechanism exists to eject a member of the eurozone, Greece will remain one until forced to reintroduce the drachma by not being able to borrow still more unrepayable debt.

    • f1b0nacc1

      For the most part, I agree with your analysis, but I don’t think you are giving the current regime in Greece (calling it a government strikes me as a bit over-generous….it is more of a caretaker, but anon…) enough credit for political smarts. A snap election won’t change what is going to happen, true, but it WILL change the political calculus within Greece, since it is most likely that Syriza would gain some leverage (and an even further leftish bent) from snap elections. This would be an excellent way to castrate its political opposition (such as it is), and guarantee that everyone is lashed to the mast as they round past the Sirens…

      • Kevin

        I don’t get what it (an election) would change. The Greek population really wants more subsidies from the EU and little (or no) reform, a view shared by Syriza. Syriza has a comfortable parliamentary majority to implement this policy. Everyone in Athens, Brussels, Berlin, etc knows all of this. A Greek election won’t change who is on the other side of the negotiating table and what they want nor will it balance the Greek budget in the absence of reforms they are unwilling to make. The Germans voters aren’t going to agree to hand over more cash just because the Greeks voted in favor of it again – they already know thus and don’t care. An election will not cut expenditures or increase tax revenue – the government already has the power to do this but prefers (very strongly) not to do so. A new election just seems like Syriza throwing up their hands and admitting they have no idea what to do. (Unless the plan is to use a fesh mandate as cover for walking back their promises to avoid reform – but I don’t see anyone saying that’s what’s going to transpire.)

        The problem Syzria faces is that (internal Greek) politics and persuasion won’t get them to the solution they want – their dispute is with their creditors and basic math – neither of whom seem amenable to change due to Greek elections.

        • f1b0nacc1

          Forgive me for not replying earlier, the real world intervened (grin)….
          The point of an election is that it would most likely increase the role of the far-left wing of Syzria, and strengthen the hand of the rejectionists. In the short term, this would matter very little (as you correctly point out), but in the long term, it would fortify the government as the inevitable negative consequences kick in. This is all about domestic political maneuvering, and is a fairly clever strategic choice.
          Your analysis of the broader situation (the ‘meta’ as I believe the kids call it…grin) is spot on, and I share your view of how it will play out. I do think, however, that Syzria is going to push for an election to strengthen their post-crisis position, not alter their capabilities pre-crisis….that ship has already sailed.

  • ljgude

    Check out Satyajit Das’s view of the Greek situation on Andrew Horowitz’s Disciplined Investor podcast number 407. Basically he thinks they will find a gradual or staged way to Grexit to avoid the problems associated with sudden financial disaster syndrome. He is a brilliant analyst with a great balance of realism, cynicism and humor. He gets right though the wurst and meringue to the inescapable unpalatables.

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