From the unthinkable to the inevitable: Part 1, breaking the crockery

May 16, 2012 | Capital markets, Currency markets, Euro, Europe, Global news, Greece, Recession, Sovereign bankruptcy, Speculation

By:David A. Smith


Nobody can see the cracks, can they?


After having wasted a perfectly good betrayal, after having winkled the Eurozone’s triumvirate out of several hundred million Euros of new financing, and after having shifted the Greek default risk from private banks (who have already learned that some animals are more equal than others) – after having had three last chances, the Greeks have by their election evidently decided to make no decision and either be completely bailed out with no end in sight, or barrel over a cliff


We sure showed them!


And that, as reported in the Financial Times, has meant a Greek exit has gone from unthinkable to inevitable.


With an exit looking possible, policymakers and investors are shifting focus to the consequences.


Once one starts contingency planning for a likelihood, the inevitability effect will take over.


It’s inevitable that the effect will come into play


The idea of a Greek exit from the eurozone is no longer fanciful.


Personally, I thought it was inevitable six months ago, when I wrote:


Here is the plain reality:


You can’t lend your way out of a solvency crisis.


If the ECB keeps pumping money in to the debtor nations, then the whole Euro will deflate.  Chancellor Merkel and President Sarkozy are going to have to choose between forcing political union, where France and Germany in effect take over the southern governments wholesale, or economic disunion, where the northern economies cut themselves free of the their southern albatross.


You stay the course even after I’m gone, okay, Angela?


The Euro is over.  Either that, or European democracy is.


Well the Greek voters, bless their vocal addled brains, have chosen their own anarchy over Brussels’ rigidity:


After 70% of voters in elections on May 6 supported parties that rejected the terms under which €174bn of international bailout loans were offered to Athens, many investors now see a fissure in the 17-member eurozone as increasingly likely.


Repeat after me: financing cannot solve a feasibility crisis, it can only solve a liquidity crisis.


While still urging Athens to stick to its agreements on austerity and reform, European governments are furiously thinking through the various scenarios.


This isn’t going to be pretty


If those hopes are dashed and Greece goes, what happens next?


As we’ll see, the short answer is broken crockery.




1. Is Greece serious about quitting the eurozone?


Answer: No, because it is burying its head in the sand.


‘Greece’ doesn’t have to be serious, because ‘Greece’ is an abstraction, a personification of 12 million people, most of whom are financially clueless and fiercely angry.


Who knows? Opinion polls showing 80% of Greeks in favor of staying in the euro combine with the election result to offer a scene of confusion.


It’s fairly simple.  They believe anyone preaching austerity is lying or bluffing.


I sense you’re full of it


Greece’s European partners say Athens cannot have it both ways.


Athens cannot – unless the rest of Europe decides to give the Greeks a free ride, and that absolutely will not happen.


Everybody rides free!


But the siren call from the radical left coalition Syriza, that Greece is safe in the eurozone with its creditors poised to ease the harsh bailout, is music to the ears of hard-pressed citizens.


C’mon, Odysseus, that fiscal discipline is too, too hard tomaintain


Popular anger is running high at the prospect of three more years of austerity while Athens implements the rest of the reform program agreed with the EU and International Monetary Fund. “We desperately need a break … If my pension is cut again, I might as well commit suicide,” says Angelos Syrigos, 85, whose modest income has been slashed by 30% in the two years since the bailout began.


In effect, the whole continent of Europe has been on a defined benefit plan, and in the US, all of us in the private sector found out forty years ago they don’t work, and those of us in the public sector are discovering now that they don’t work.


Alexis Tsipras, Syriza’s charismatic 37-year-old leader, who emerged as a kingmaker following his party’s surge to second place at last Sunday’s inconclusive general election, is gaining in support. Opinion polls published at the weekend showed Syriza would win first place in a second election, with 20-25% of the vote.


I don’t have to be right, I just have to be the vote-winner


To be precise, in any Greek election, the winning candidate will be None of the above, and that’s a prescription for default, because it violates the basic principles of being a good delinquent borrower.


Mr. Tsipras insists Brussels and Berlin will not force Greece out of the euro because of the contagion effect this would have on Portugal, Ireland and Spain.


Especially if not punished


Never play showdown poker with a woman with a gun, Mr. Tsipras.  You might make her mad.


You won’t like me when I’m angry


Or you might make her make an example out of you, pour encourager les autres.


He has demanded a reversal of salary and pension cuts imposed by the bailout, as well as the hiring of 100,000 new public sector workers to reduce the impact of a 21% unemployment rate.


Well, neither of those things can happen while Greece is in the Eurozone.


Middle-aged Greeks are afraid of a eurozone exit, fearing a further collapse in property values, the crumbling of the banking system and high unemployment.


Unlike what you have now?


Now we see the violence inherent in the system!


“The gravity of the situation isn’t appreciated. Some people believe Syriza will change its tune, others that the Europeans make empty threats,” says Takis Michas, a political commentator. “The only thing that will focus minds is when the money to pay pensions and salaries just doesn’t arrive.”


That’s already happened in Alabama.


2. Is Europe ready to jettison one of its own?


Answer: Yes.


You’re just surplus costs


Eurozone officials had prepared contingency plans for a Greek exit – or “Grexit” as some have called it – after George Papandreou, then prime minister, proposed a national referendum in October on euro membership.


As they said in Broken Arrow (one of the great cheesy movies of modern times), “It’s bad enough we’ve lost a nuclear weapon, what’s worse is that we have a name for it!”


I wish we didn’t have a name for this


Indeed, Wolfgang Schauble, German finance minister, actively urged the referendum to halt the endless questioning once and for all, according to one senior European official.


Be sensible or I’ll mind-meld your head


Mr. Schauble, a sensible German, undoubtedly expected the Greeks to be sensible Germans too.  But they weren’t.


Even then, such officials were uncertain whether the rest of the currency union could survive the shockwaves unleashed by a return of the drachma – particularly in bailed-out countries such as Portugal and Ireland, where bank runs and market panic could follow on the assumption that others could follow Greece out of the eurozone door.


It could happen to you


But now, with a new, permanent €500bn rescue fund backed by the strength of an international treaty with multiple tools to buy sovereign bonds on the open market and inject capital into eurozone banks, some officials believe the contagion could be contained – much as it was after Athens finally defaulted on private bondholders last month.


Here is where Mr. Tsipras miscalculates because he fails to understand triage and the observant herd. 


“Two years ago a Greek exit would have been catastrophic on the scale of Lehman Brothers,” says a senior EU official involved in discussions about Greece’s future. “Even a year ago, it would have been extremely risky in terms of contagion and chain reaction in the banking system. Two years on, we’re better prepared.”



I hope that is true – but for Greece and the Eurozone, what matters is not whether it is true, but whether Europe’s leaders now convince themselves it is true.  After having convinced themselves for years that the problem would sort itself out, to convince themselves only one nation will go down should be easy enough.


The new eurozone firewall – now backed with additional resources for [sic: from] the IMF – is not the only reason some officials are becoming increasingly sanguine about losing Greece.


‘Sanguine’ is not a good word for your prospects, Mr. Tsipras.


So what? Sanguine is a French word


Spain and Italy, they say, have taken huge steps to put their economic houses in order, enabling them to bounce back quickly if credit markets suddenly dry up and their banks wobble.


If one has a limited supply of vaccine to contain a potential outbreak, one hoards it for those who behave well and may survive, rather than wasting it on those who not only may die, but who have brought out their sick condition.


Still, uncertainty over how Europe’s banks would be affected has continued to be the primary concern. Witnessing Greek bank customers suddenly having their euros turned into drachmas overnight, depositors in other peripheral banks might suddenly withdraw their cash and place it in seemingly safer euro accounts in Germany or elsewhere.


I expect they would, so more than likely the other European countries with wobbly Euro prospects will impose currency controls of their own. 


Such a massive run could destroy much of the eurozone periphery’s banking sector. “The ball is genuinely in their court,” says the EU official. “Those who understand the situation realize their room for maneuver is extremely limited. We simply have to wait.”


So Greece is almost certain to crack out of the Eurozone.  What then?


Must … read … blogs …

[Continued tomorrow in Part 2.]