EU NEEDS GREECE
Economics not only concern
If Greek Prime Minister Alexis Tsipras did anything with regards to the July 5 referendum call, it was to finally bring things to a head. A resolution is now in sight, so we should actually thank him.
But something tells me that the real goal of Greece’s troika of lenders is to get the ruling Syriza party (plus its more radical coalition partners) out of power.
Tsipras had a proposal a week ago that the markets thought would be accepted. That was shot down because of the troika’s insistence that there be no haircuts, even though everyone knows this debt never gets paid off and all that austerity has done thus far is blow a 25 per cent hole in Greece’s GDP.
Tsipras knew he had reached the end of the line and would not squeeze out more concessions. For all the “surprise” over his referendum call, it is actually perfectly logical. And, unlike the confused tome penned by Quebec separatists in 1995, this question is short and to the point:
“Should the proposal that was submitted by the European Commission, the European Central Bank and the International Monetary Fund at the Eurogroup of June 25, 2015, which consists of two parts that together constitute their comprehensive proposal, be accepted?”
Now, maybe the Greek citizenry will have to bone up on what the troika offered in the latest package in order to make an informed decision, but, heck, that is exactly what the Internet is for.
If money does talk, then the ECB’s decision to cut the Greek banks off from any further incremental increases in emergency funding is going to cause a big financial squeeze as the local financial system is now shut down indefinitely.
The ECB realizes that now that Greece has missed its IMF payment, the country’s debt can no longer be classified as being of sufficiently high-quality collateral for entry onto the central bank balance sheet. And every day that goes by with the banking system closed is going to cost the Greek economy that much more in terms of lost spending and output. In other words, the depression gets worse, not better. A classic catch-22.
A yes vote on Sunday would open the door for a new round of negotiations, though the nearterm problem is that, without a bailout plan in place, the financial system would still be in lockdown mode. Perhaps some form of bridge financing such as what Cyprus secured two years ago could be an interim solution.
But make no mistake, a yes vote would ostensibly be cheered by the troika, and not just for obvious reasons that a messy divorce would be averted. Tsipras would likely be forced to resign, and a new political coalition more ready to compromise (acquiesce?) would probably take over the helm in Athens.
If there is a “no” result on Sunday, the Greek government would likely be faced with extended capital controls, no access to the ECB, and salaries and pension benefits would be paid in ever-more-worthless IOUs. Assets would be radically marked down.
This is why it is hard to fathom why anyone, outside of pensioners, would ever want to vote for something that ensures poverty for a prolonged period of time.
A no vote does not necessarily end with Greece’s leaving the euro indefinitely. There may be a temporary period where some form of scrip is used to fulfil domestic obligations such as wages and pensions.
Even so, there are high odds that chaos ensues and the resulting mayhem may end up forcing a new vote, or perhaps a new government, as the economic pain becomes too much to bear.
The EU is walking on some very thin ice here, too.
There are subtle reasons why the euro area cannot afford to alienate or isolate Greece, and they are not related to finances or economics, but are more geopolitical in nature.
Greece has close ties with Russia, Iran and China. Greece also is strategically situated within NATO — geographically representing its southern tip. It has improved relations with Turkey and is a key player in the Middle East.
Think of the new Vladimir Putin era; think of the instability in the Middle East; think of the tenuous EU-Turkish relationship; think of China’s seeking new “strategic” relationships (as in Greece’s vast energy resources, especially in expanded natural gas pipelines with international networks); think of Iran’s relationship with Greece as Barack Obama desperately tries to ink a nuclear deal.
Greece is one of the precious few EU countries that manages to meet its budgetary commitments to NATO. Don’t for a second think this is lost on the Americans. The country has some very important ports, as well.
Greece may be a fragile economic state, but it is also a highly valuable geopolitical asset for the EU. A resolution to this financial crisis should, and probably will, have to take this into account.
The reality is that Greece provides vital security for wide segments of the EU’s external border. The world cannot afford a policy vacuum because of this ridiculous game of brinksmanship, which is exposing the EU institutional framework as a dismal failure in managing crises.
Obama or U.S. secretary of the treasurer Jake Lew is on the phone practically every day with the EU leadership to get this logjam solved, not for the economics, but for the geopolitics.
Tail risks have risen, indeed, but an outright Greek exit is still low odds — just not as low as they were last week.
Take the ECB at its word when it said, as it capped additional emergency liquidity assistance (ELA) funding, that the Governing Council is “closely monitoring the situation and potential implications for its monetary policy stance.”
This means more quantitative easing if needed and perhaps even a launch of outright monetary transactions (OMT). The ECB has many more tools in the kit than it has ever had — which is why the peripheral bond yields rose moderately this week (Italy and Spain are at U.S. levels on the 10-year).
Even the euro managed to consolidate near US$1.11. The stock market took it on the chin, but the selling, especially in the context of the less dramatic moves in yields and the currency, looks to be overdone.
It’s called “ring fencing.” The carnage from Greece was contained from a bond and currency perspective. The stock market may have had a tumble anyway, based on the events unfolding in China.
Still, remember what ECB president Mario Draghi told us years ago: the ECB will do “whatever it takes” to preserve the euro.
This is not Lehman circa 2008, nor is it Greece circa 2012. Lehman could certainly have used the U.S. Federal Reserve’s balance sheet, but investment banks did not fall under Ben Bernanke’s umbrella at the time.
And remember that Draghi was just getting his feet wet as ECB president during the last Greek restructuring when there was a huge contagion effect.
So, yes, this time it is different.