Well, This Is What I Think

The “bad news is good news” principle has been running hot again in the last couple of weeks with all the interest in Greece and its sovereign debt crisis. Economics reporters from around the world have been banging the drum with ferocity signalling that the end of the world is nigh. Very nigh. People gulp their coffee nervously. Stock markets are jittery.

But is a Greek exit from the Euro really likely?

The short answer is No. Oxi, in fact.

That the problem requires resolving is undoubted. Greek banks are very strapped for cash, and the stage is set for people being unable to access their savings. This is the nightmare scenario as far as civil peace is concerned, let alone international trade and business confidence.

But some factors are being ignored in the breathless doom-laden reporting. We summarise the key ones here.

The debt is unsustainable, so some of it will end up being written off. The question is when.

In or out of the Euro, Greek debt has reached levels that are unsustainable by an economy of its size, under any circumstances. It just can’t generate enough trade or tax receipts to pay it back at any sort of meaningful rate. Why this has been allowed to happen is another story, but it doesn’t matter now. It is what it is.

The IMF has recognised this, and said that some form of “debt relief” is required.

In other words, writing off debt. (Probably about half of it.)

This will have to happen whatever the future relationship of Greece to the Euro will be, because unsustainable debt levels will make the Greek currency effectively worthless, which would be to no one’s advantage and would cause much greater ripples through the world economy than writing off some of the debt would.

The problem is political, not economic.

The money is, in effect, “gone” already, dispersed throughout the Greek business community and general population in lending, social support payments and so on. There’s no getting it back, and no way to generate it. What Angela Merkel and others have to do is “sell” retiring the debt to their own taxpayers, which is going to be made more difficult by the hard-edged rhetoric they have employed in recent months. Nevertheless, it’s worse than the alternative, so they will bite the bullet and do it.

What will happen?

A portion of the debt will be forgiven – probably about half – but to make this politically acceptable in the rest of Europe some or all of it may be theoretically rescheduled on the “never never” – the debt pushed out by 20 or 30 years – in reality, never to be repaid.

No one wants Greece in turmoil again.

It is easily forgotten that for the “mother of democracy”, Greece is a relatively recent convert to democracy. It was a military dictatorship as recently as the 1960s, and endured an horrendous civil war in the immediate aftermath of World War II. To see the country descend into chaos again is unthinkable for both the “European project” and for the geo-political balance in the region.

Long embroiled in conflicts with their neighbours, an aggressive dictatorship of left or right could spread uncertainty and trouble to Cyprus (dangerously near the Middle East), Albania, Macedonia, and worst of all, Turkey.

None of the people that really run the Western world are going to stand idly by and watch that happen over a pot of money, no matter how big that pot is.

What will happen?

The Western powers will stumble haltingly towards a solution to the debt crisis that keeps Greece stable. Expect to see the rhetoric and the bombast toned down significantly on both sides in the next few days, ahead of a compromise that sees Greece stay in the Eurozone and reduces the fractiousness inside the country. The unexpected discarding of the combative Greek finance minister Yanis Varoufakis by Greek Prime Minister Tsipras is a symbol that this process is already underway in earnest.

The Russia factor

Everyone in the West knows that a newly aggressive Vladimir Putin would like nothing more than to bail out Greece (which he has the money to do), both to thumb his nose at Europe (with whom he is enduring real on-going problems over Ukraine), and by bailing them out win an ally where he could base his Red Sea fleet actually on the Med itself. Which would be his price for the support.

What will happen?

America will never let Russia make such a move. So the lines are running hot between America and Europe right now telling the Europeans that they’ve had their fun and to pull their heads in. “Settle it before it gets worse” will be the message.

The European ideal

It is often forgotten – most often by those on the Right – that the EU is about much more than economics.

It always was designed as a device to impose stability on a region that had been at war for thousands of years, and most horribly within living memory in 1939-45. It was rarely sold to the voters like that – who tend to be much more amenable to hip-pocket issues like how much tax they’re paying and whether or not they’ve winning or losing from EU contributions – but that is nevertheless the driving morality behind the whole project.

And as recently as the Balkan conflict Europe has been reminded of the capacity of the area to dissolve into internecine feuding. Issues of economic security dominate over economic efficiency.

That’s why the EU project consistently ignores bleating about “loss of sovereignty” from political parties and national parliaments and stresses instead the role each country plays in “running” Europe. This makes the EU top-heavy, over-centralised, frequently the butt of satire about its tortuous legislative burden, and unpopular. Nevertheless the blow to the European ideal of seeing a “Grexit” (which might lead to similar problems from other small countries) would far outweigh the benefit of disciplining Greece further.

What will happen?

The European ideal will triumph over neo-con economics. It won’t be sold like that, but that’s what will happen.

There is no legal mechanism to force Greek out of the Euro.

One of the oft-repeated canards in the last few weeks has been that Europe will “kick Greece out”. The problem is, they actually can’t. There is no legal mechanism by which a member of the Euro can be made to exit it against their will.

As no-one in Greece actually wants to leave the Euro, whatever their attitude to the austerity measures Europe seeks to impose, Europe is stuck with Greece as a member whether Europe likes it or not. This scholarly article explains the law behind the situation.

What will happen?

The only way Greece can exit the Euro is if it chooses to. Greece won’t, as it knows a “New Drachma” does not have the gold backing to survive as a viable currency in world economy. The new currency would devalue by 25-50% overnight, destroying savings and making trade with Greece virtually impossible. No external traders or countries would trust the new currency. What’s more the very first step would be the IMF having to lend what has been estimated as $25 billion of new money to support the currency, which really would be good money after bad. It’s one thing to write off debts you’ve already factored into the balance sheet, quite another to keep making the balance sheet looking worse.

So what’s in it for Greece to leave? Nothing. So they won’t.

Commonsense will prevail.

In or out of the Euro, Greece is going to default in its debts, whatever it ends up being called.

It’s a bit like an ordinary working individual borrowing a home mortgage of ten million bucks to build a palace, and then turning round and saying “Oops, sorry, can’t pay you back. But the money’s gone: the home is built.

Sure, the lender can take back possession, but they still have to sell it to get their money back. Then they discover the home is actually made of ticky tacky and it’s really only worth $500,000. They’re going to eat the $9.5 million.

The bank can rail all it likes about how unfair that is, but the guy who built the house has now died, and his son is only 18. He claims – fairly – that he is not responsible for the lunacy of his father, over which he had no control.

Sure, be angry at the now dead home builder. And sack the idiot who gave him the ten million in the first place. But it still doesn’t solve the problem, and the bank still wants the son as a customer.

The only question at stake is by how much will Greece default, and when.

What will happen?

Given that Greece out of the Euro is even worse for Europe than Greece in the Euro, the hard heads are currently saying to each other “Damn, they called our bluff, we’re out of options, we have to make a deal.” What you will see (probably tomorrow night) is is a few crumbs thrown by the Greeks to the Germans so that the central bankers and Angela Merkel can save face.

The wash up will be that the Greek Government will appear willing to continue to reform the Greek economy and live in a $500,000 house rather than a $10 million one. And there are signs that, on their own terms, they are willing to continue the reform process, especially as regards fixing tax avoidance, which is a national sport in Greece. Whether they will increase their consumption tax or give pensions a hit is imponderable, but some small ground may even be yielded on those sticking points to sweeten the pill. And the lenders will settle for that. They have no choice. The money’s gone. What they will do is dress it up so that every other indebted country in the EU will not then immediately say “OK, us too, please.”

The crisis will have to be resolved in the next 48-72 hours. We expect it will be. With Greece inside the Eurozone.

Which will be very boring for those journos that like nothing more than to stir up panic because it sells papers – or hits on websites, today – but there it is.

The long-term damage to the concept of Europe for its citizens is more difficult to predict. This heartfelt article should make us all pause and consider.