A Greek sui­cide?

Financial Mirror (Cyprus) - - FRONT PAGE -

The good news is that a Greek de­fault, which has be­come more likely af­ter Prime Min­is­ter Alexis Tsipras’ provoca­tive rejection of what he de­scribed as the “ab­surd” bailout of­fer by Greece’s cred­i­tors, no longer poses a se­ri­ous threat to the rest of Europe. The bad news is that Tsipras does not seem to un­der­stand this.

To judge by Tsipras’s bel­liger­ence, he firmly be­lieves that Europe needs Greece as des­per­ately as Greece needs Europe. This is the true “ab­sur­dity” in the present ne­go­ti­a­tions, and Tsipras’ mis­ap­pre­hen­sion of his bar­gain­ing power now risks catas­tro­phe for his coun­try, hu­mil­i­a­tion for his Syriza party, or both.

The most likely out­come is that Tsipras will eat his words and sub­mit to the con­di­tions set by the “troika” (the Euro­pean Com­mis­sion, Euro­pean Cen­tral Bank, and the In­ter­na­tional Mon­e­tary Fund) be­fore the end of June. If not, the ECB will stop sup­port­ing the Greek bank­ing sys­tem, and the gov­ern­ment will run out of money to ser­vice for­eign debts and, more dra­mat­i­cally, to pay Greek cit­i­zens their pen­sions and wages. Cut off from all ex­ter­nal fi­nance, Greece will be­come an eco­nomic pariah – the Ar­gentina of Europe – and public pres­sure will pre­sum­ably oust Syriza from power.

This out­come is all the more tragic, given that the eco­nomic anal­y­sis un­der­ly­ing Syriza’s de­mand for an eas­ing of aus­ter­ity was broadly right. In­stead of seek­ing a face-sav­ing com­pro­mise on soft­en­ing the troika pro­gramme, Tsipras wasted six months on sym­bolic bat­tles over eco­nom­i­cally ir­rel­e­vant is­sues such as labour laws, pri­vati­sa­tions, even the name of the troika.

This provoca­tive be­hav­iour lost Greece all po­ten­tial al­lies in France and Italy. Worse still, the time wasted on po­lit­i­cal grand­stand­ing de­stroyed the pri­mary bud­get sur­plus, which was Tsipras’s trump card in the early ne­go­ti­a­tions.

Now Tsipras thinks he holds another trump card: Europe’s fear of a Greek de­fault. But this is a delu­sion pro­moted by his fi­nance min­is­ter, Yanis Varoufakis. A pro­fes­sor of game the­ory, Varoufakis re­cently boasted to the New York Times that “lit­tle Greece, in or­der to sur­vive, [could] bring down the fi­nan­cial world,” and that his media im­age “as an ir­ra­tional fool… is do­ing my work for me” by fright­en­ing other EU fi­nance min­is­ters.

Ap­par­ently, Varoufakis be­lieves that his “so­phis­ti­cated grasp of game the­ory” gives Greece a cru­cial ad­van­tage in “the com­pli­cated dy­nam­ics” of the ne­go­ti­a­tions. In fact, the game be­ing played out in Europe is less like chess than like tic-tac-toe, where a draw is the nor­mal out­come, but a wrong move means cer­tain de­feat.

The rules of this

game

are much sim­pler than Varoufakis ex­pected be­cause of a mo­men­tous event that oc­curred in the same week as the Greek elec­tion. On Jan­uary 22, the ECB took decisive ac­tion to pro­tect the eu­ro­zone from a pos­si­ble Greek de­fault. By an­nounc­ing a huge pro­gram of bond pur­chases, much big­ger rel­a­tive to the eu­ro­zone bond mar­ket than the quan­ti­ta­tive eas­ing im­ple­mented in the United States, Bri­tain, or Ja­pan, ECB Pres­i­dent Mario Draghi erected the im­pen­e­tra­ble fire­wall that had long been needed to pro­tect the mon­e­tary Union from a Lehman-style fi­nan­cial melt­down.

The ECB’s new­found abil­ity to print money, es­sen­tially with­out limit, to sup­port both banks and gov­ern­ments has re­duced Greek con­ta­gion to in­signif­i­cance. That rep­re­sents a pro­found change in Europe’s fi­nan­cial en­vi­ron­ment, which Greek politi­cians, along with many eco­nomic an­a­lysts, still fail to un­der­stand.

Be­fore the ECB’s de­ci­sion, con­ta­gion from Greece was a gen­uine threat. If the Greek gov­ern­ment de­faulted or tried to aban­don the euro, Greece’s banks would col­lapse, and Greeks who failed to get their money out of the coun­try would lose their sav­ings, as oc­curred in Cyprus in 2013. When savers in other in­debted euro coun­tries such as Por­tu­gal and Spain ob­served this, they would fear sim­i­lar losses and move their money to banks in Ger­many or Aus­tria, as well as sell their hold­ings of Por­tuguese or Span­ish gov­ern­ment bonds.

As re­sult, the debtor coun­tries’ bond prices would col­lapse, in­ter­est rates would soar, and banks would be threat­ened with col­lapse. If the con­ta­gion from Greece in­ten­si­fied, the next-weak­est coun­try, prob­a­bly Por­tu­gal, would find it­self un­able to sup­port its bank­ing sys­tem or pay its debts.

a In ex­tremis, it would aban­don fol­low­ing the Greek ex­am­ple.

Be­fore Jan­uary, this se­quence of events was quite likely, but the ECB’s bond-buy­ing pro­gramme put a fire­break at each point of the con­ta­gion process. If hold­ers of Por­tuguese bonds are alarmed by a fu­ture Greek de­fault, the ECB will sim­ply in­crease its bond buy­ing; with no limit to its buy­ing power, it will easily over­whelm any selling pres­sure.

If savers in Por­tuguese banks start mov­ing their money to Ger­many, the ECB will re­cy­cle these eu­ros back to Por­tu­gal through in­ter­bank de­posits. Again, there is no limit to how much money the ECB can re­cy­cle, pro­vided Por­tuguese banks re­main sol­vent – which they will, so long as the ECB con­tin­ues to buy Por­tuguese gov­ern­ment bonds.

In short, the ECB bond-buy­ing pro­gramme has trans­formed the ECB from a pas­sive ob­server of the euro cri­sis, paral­ysed by the out­dated le­gal­is­tic con­straints of the Maas­tricht Treaty, into a proper len­der of last re­sort. With pow­ers to mon­e­tize gov­ern­ment debts sim­i­lar to those ex­er­cised by the US Fed­eral Re­serve, the Bank of Ja­pan, and the Bank of Eng­land, the ECB can now guar­an­tee the eu­ro­zone against fi­nan­cial con­ta­gion.

Un­for­tu­nately for Greece, this has been lost on the Tsipras gov­ern­ment. Greek politi­cians who still see the threat of fi­nan­cial con­ta­gion as their trump card should note the co­in­ci­dence of the Greek elec­tion and the ECB’s bond-buy­ing pro­gram and draw the ob­vi­ous con­clu­sion. The ECB’s new pol­icy was de­signed to pro­tect the euro from the con­se­quences of a Greek exit or de­fault.

The latest Greek ne­go­ti­at­ing strat­egy is to de­mand a ran­som to de­sist threat­en­ing sui­cide. Such black­mail might work for a sui­cide bomber. But Greece is just hold­ing a gun to its own head – and Europe does not need to care very much if it pulls the trig­ger.

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