Eight truths about Greece and the future
Whatever happens will end in contagion
by David Marsh
Mon 22 Jun 2015
Acres of column inches have been expended on Greece and the future. Here are eight succinct truths to guide observers through the next few days.
1. There will be no quick and easy end to the Greek affair. Unstable disequilibria can last a long time. For four centuries, Greece was part of the Ottoman Empire. Tonight’s unhappy meeting of euro area leaders will not be the last time they gather to consider an intractable imbroglio.
2. Greece holds a lot of the cards. No doubt some kind of deal will be done to prevent – for the moment at least – full-scale ejection from the euro bloc. As I wrote four months ago, the single currency’s most troublesome state will remain inside the euro as long as Greek nuisance value (GNV), both political and economic, is held to be lower inside the system (I) than it would be outside (O). For the time being, GNV-I is – just – less than GNV-O. All sorts of Greek manoeuvring – whether talks with President Vladimir Putin or speculation about a Greek exit bringing down the euro ‘house of cards’ – are useful ploys to stoke up European fears of GNV-O.
3. The funds that are now leaving Greek banks to the tune of €1bn a day, whether being taken abroad or simply kept under the mattress, are all effectively liabilities of the European Central Bank, to be paid ultimately (if things go wrong) by European taxpayers. The ECB, as an unelected body run by technocrats, cannot by itself pull the plug on Greece and declare the banks insolvent. The Greek government has no great wish to bring in exchange controls (although soon it may be forced to) since withdrawn euros represent a negotiating tool against its creditors and a store of value that many Greeks can use to hedge against a return of the drachma.
4. The International Monetary Fund is unlikely to get its money back on time. An internal IMF assessment two years ago ruled that the Fund’s exceptional loan to Greece in 2010 was made on far too optimistic assumptions about the country’s debt sustainability and ability to carry out adjustment, breaching the IMF’s own rules. US taxpayers will lose money. So please forget any idea that Congress will agree IMF governance and voting reforms any time in the next few years.
5. Angela Merkel, the German chancellor, will be a big loser. The pressure is on her to hold the euro area together and maintain Germany’s European credentials without damaging the pocketbooks of German taxpayers and turning the euro into an overt transfer union. This is an impossible task. Her biggest adversaries are likely to be within her own coalition with the Social Democratic Party, which, however unfairly, will publicly blame her for any unsavoury outcome. Shaming Merkel over Greek debt may be unscrupulous, but if it delivers the SPD a chance of winning the 2017 election, then the party will seize it.
6. Karl Otto Pöhl, the former Bundesbank president who died in December, was right when he said, a few days after the May 2010 bail-out, that it was decided to save (roughly in that order) rich Greeks, and French and German banks. The Bundesbank’s qualms over the ECB’s purchases of the bonds of Greece and other peripheral countries, publicly though impotently voiced at the time, were never likely to derail the action. But we will hear more of them now that taxpayers in Germany and other creditor countries start to weigh up the bill.
7. Yanis Varoufakis, the much-criticised Greek finance minister, has played a weak hand with complete disregard for the rules of the game, but with breathtaking audacity and some skill. From serial debtors, creditor countries expect grovelling not gravitas. Varoufakis, then an academic, opposed the 2010 bail-out, and declared his country insolvent the moment he took office in January. The end of the Greek battle will be melancholy for everyone, and Varoufakis has made plenty of enemies. But, by refusing to sue for a creditors’ peace, he may be judged as ending on the winning side.
8. Whatever happens will end in contagion. If a deal is struck (as is likely) that gives Greece significant debt relief, for example, by transferring Greece’s loans from the ECB to the European Stability Mechanism, that will further weaken the finances of debtor nations like Italy and Spain that are also among leading Greek creditors. If the creditors force further pain on Greece, its inability to pay and its capacity for further wrangling will continue. If Greece does eventually have to leave the euro, then – irrespective of whether it does well or badly outside – we would see the faltering of a system that was supposedly irrevocable and impregnable. Further absconsions, over time, would be inevitable. This is the most important reason why, for the time being, Greece will probably remain within the walls.
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