A Greek Tragedy

A Greek Tragedy

February 7th, 2015 // 11:20 am @

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Recent events in Greece have all the makings of a further tragedy for Greece, and the possibility of a wider European economic tragedy.

The Greek people have elected a radical government with a charismatic leader in Alexis Tsipras, this was an entirely predictable outcome and one that we may see repeated across other troubled counties in the Euro zone as voters loose belief in traditional political parties.

From a Greek electors perspective the last years have been an economic tsunami, with GDP down 25% since 2009, wages down 20% since 2002 and unemployment above 25%. In such circumstances rejecting mainstream politics is understandable.

Terrible as this is GDP is still nearly twice what it was in 2002 when they joined the Euro zone, and wages are still above 2002 levels, however having experienced the boom years of 2002-2008, even if they were funded by unsustainable borrowing the pain of what has happened since is devastating to Greeks.

In reality joining the Euro zone gave the Greek economy a short term boom, based on borrowing cheap money which lenders allowed as they saw the Euro as being backed by Germany and therefore safe. The Greek government borrowed irresponsibly created a boom, and did little to make the structural reform so required in that country.

The government the Greeks have elected is a one idea, one mandate Government. The members of the Syriza party itself contains a wide range of left wing groups, including about a third of the party which is communist in its ideology, Alexis Tsipras himself was a communist as a young man. In government they have entered a coalition with the right wing Independence Party, the only unifying idea is to end austerity.

The first step to ending austerity is to get as much debt relief as they can from the EU. Beyond that I suspect the present Greek government will struggle to agree on almost anything. Even if the EU were to write off all debts tomorrow the government of Greece would be unlikely to be able to agree a cohesive plan for the future beyond that.

Alexis Tsipras and his Finance Minister Yanis Varoufakis are touring Europe on a charm offensive to get debt relief, and more widely to move Europe away from austerity towards more growth orientated policies. While they may have a point that the balance between growth and austerity has been wrong, their reception has been to date cool in much of Europe and frosty in Germany, where Angela Merke has resisted even meeting them.

Many Europeans and particularly Germans are emotionally very committed to balanced budgets and to achieve them through austerity if necessary. Their concern is also and probably correctly that if Greece is given debt relief they will slow or even reverse the structural reforms they have been working on, and Syriza won the election on very clear promises to roll back austerity. Angela Merkel’s political room for manoeuvre in Germany is very limited even if she wanted to do more.

Therefore we now get some high wire diplomacy where the risk of a catastrophic outcome is real, either by design or more likely by accident.

Alexis Tsipras is negotiating from a position that is far from strong, he has the moral argument about driving growth more than austerity which will have some support across Europe, but his only powerful negotiating argument is he can trigger a Greek exit from the Euro, default and then probably exit from the EU, which will be damaging to the Euro zone and the EU.

How much damage such an exit and default would cause is impossible to say. The damage to Greece would be serious; a new Drachma would plummet in value, inflation would sore and Greece would be shut out of capital markets for years. The Greek economy would sink even further into a major recession that could last a decade.

The wider damage to the Euro Zone and EU are more psychological than fiscal. The idea that countries could and possibly should leave the Euro zone brings the whole idea of the Euro into question. The cost of borrowing for other weak Euro zone countries would rise sharply on the risk of their default and Euro exit, such rises in borrowing costs in themselves could wreck economies, and the Euro Zone does not have the money to save a country the size of Italy, Spain, or even France.

So Alexis Tsipras’s real power is the implied threat or bluff of a Greek default, Euro exit and all the potential fall out. While he is strenuously denying this is even a possibility, it is the one thing that might drive real concessions from the EU.

Europe and in particular Angela Merkel need to face this potential Armageddon, but in reality there is little they can do. Writing off some of the debt is politically unpalatable in Germany and would require some EU countries to get parliamentary approval, which would be unlikely to be forthcoming. The debt repayments can be pushed out and interest cut, but as the debt is already at low rates and over long periods so the room for this is limited.

But Angela Merkel is the queen of the political fudge that puts the crisis off for now, and pushes it down the road. That is one of her great strengths and her biggest weakness.

So what next? We will probably see some sort of offer made to Greece but it will be more for show than substance, and Alexis Tsipras’s has to try and sell that to his party and the Greek people, as I do not think he is ready to intentionally trigger a default, and Euro exit.

Where this leaves him and his party is difficult to see, they will have regardless of some minor concessions failed in the one goal they agree on and have a mandate for. The possibility of a serious political crisis in Greece is very real, and that is only going to make the problems of that country worse, and the possibility of an accidental default under such a political crisis are very real.

If Alexis Tsipras’s can keep his party on track it still leaves the issue of what they do next? To drive economic growth and reverse some of the austerity takes money, which Greece does not have. Borrowing more on the promise of economic growth that will allow the new and old borrowing to be repaid is highly optimistic, and it is hard to see who would be prepared to lend money under such circumstances, the Greeks could approach Moscow, but whether Putin has the spare money or inclination to get into further conflict with the west is doubtful.

The risk of a mistaken Greek default and exit remains real, these negotiations are happening in a very time sensitive and dangerous environment.

The Greek government has to make significant repayments in the coming weeks, and to do so needs the next installment of cash from the Troika. As of today the Greek government is refusing to even talk with them, and has announced reversals of Troika required reform which they seem fully committed too, so the Troika may be unwilling to forward the next 7.2 billion Euro’s.

The ECB has stopped Greek banks using Greek Bonds as collateral to borrow, which puts the banking system and the economy under more pressure.

Another short-term fix that gives the Greeks little in real terms, but that the EU will hope puts off the problem, as has happened since the start of the Euro crisis does not seem the way forward, but it is what will probably happen.

Alexis Tsipras’s is then left having achieved little, but he will probably try and sell this as success in Greece as his only other option is to trigger a default and Euro exit. This being so far short of the expectations he has built up in Greece will probably cause political instability, both within his party and within the country causing gridlock which only makes the issues worse.

Behind the negotiations are some very cold hard facts; the EU and primarily Germany are not going to willingly write off any significant part of the Greek debt. The Greek debt particularly from a Greek perspective looks close to impossible for them to repay. Putting aside present negotiations and posturing the only two long term options are, Greece accepts further years of austerity and effective economic control from Europe while it slowly digs itself out of its debt, or it defaults, triggering an Euro exit and EU departure.

Either side, despite some probable short-term deal to put the immediate problem off, is not facing up to these two facts; and these two facts remain the two long-term options.

I think as this becomes clear to the Greek people and their government they will choose default and exit either deliberately or more likely in some sort of unforeseen crisis that overwhelms them.

It would be better for the EU to accept this reality and organize an orderly default and exit, but that is probably politically impossible, as it would show Europe and particularly Angela Merkel having lent huge amounts of money and then writing the debt off, she is too good a politician to be seen doing that.

Therefore this may play out as, short term face saving deal that delays the problem, Alexis Tsipras trying to sell that in Greece while he implements his austerity roll back, and then probably triggered by some small issue an unplanned default, and Greek exit from the Euro and EU.

A tragedy for everyone particularly Greece.

 

 

 

 

 

 

 


Category : Other Thoughts

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