Greece, Again

By May 8, 2012, 5:58 PM Author's Blog  

It is shaping up to be another long, hot summer, and not just because of global warning.  As has been widely noted, the austerity backlash in Europe began in earnest this past weekend.  And Greece is once again the epicenter, at least for now.  The Greek political system appears rudderless, which is calling into question the nation’s resolve to complete the conditions of the last bailout package.  Moreover, there are open calls for Greece to renege on the deal:

Greece’s Syriza party leader Alexis Tsipras, charged with forming a government, told his pro-bailout counterparts they must renounce support for the European Union- led rescue if there is to be any chance of forging a coalition.

Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their pledges to implement austerity measures by the time he meets with them tomorrow to discuss forming a coalition. Samaras said he would not do so, and would support a minority government if necessary.

The Troika can’t be particularly optimistic about Greek resolve whatever government finally holds together.  Also note that in the coming days, Greece is faced with some real debt management decisions.  From Bloomberg:

The government taking office after this weekend’s election has 30 days to decide whether to make today’s interest payment on 20 billion yen ($250 million) of 4.5 percent notes maturing in 2016, or default. Then, by May 15, officials must decide if they’re going to repay the 436 million euros ($555 million) due on a floating-rate note issued a decade ago.

These are among about 7 billion euros of bonds whose holders took advantage of being governed by foreign rather than Greek law to sidestep losses suffered under the private-sector involvement rescheduling, or PSI. Paying the holdouts in full would arouse the ire of Greek taxpayers, as well as investors who cooperated with PSI. A failure to pay would signal Europe’s debt crisis is worsening.

A lot of moving pieces here, but any way you organize the pieces, the odds of a Greek exit from the Eurozone are heading up with each passing day, and market participants are increasingly leaning in that direction.  From Bloomberg:

“This summer I think is very likely,” Taylor, founder and chief executive officer of FX Concepts in New York, said today in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen. “The Europeans aren’t going to give them the money, the International Monetary Fund’s not going to give them an OK. They will be out of money in June.”

June is coming up fast.  And, for the moment, the rest of Europe is drawing a line in the sand.  As expected, the Germans are at the forefront.  From Reuters:

The European Central Bank will not renegotiate Greece’s bailout package and there are no alternatives to sticking with it if Greece wants to stay in the euro zone, ECB Executive Board member Joerg Asmussen was quoted as saying on Tuesday.

“Greece needs to be aware that there are no alternatives to the agreed bailout program, if it wants to stay in the euro zone,” Asmussen told German financial daily Handelsblatt.

See also Athens News.  Of course, the sustainability of the last bailout might have been a moot point anyway, given that the Greek economy will likely deteriorate more than expected anyway.  From Athens news:

The economy will contract by a steeper-than-expected 5 percent this year, the central bank chief said in a speech to the bank’s shareholders on Tuesday.

Last month, the bank in March had forecast a 4.5 percent contraction in the economy this year.

I don’t know if this includes expectations of a decline of the Greek tourism industry. From  ekathimerini:

Online tourism bookings from abroad are pointing to a 12.5 percent decline for this year, according to the Airfasttickets travel agency.

Nikos Koklonis, head of the company that owns the agency, says that the biggest drop in bookings for Greek destinations this year is from the German market, which last year accounted for 15 percent of all bookings. Its share has now shrunk to just 3 percent.

In my opinion, what makes a Greek exit more likely is the apparently growing belief that the external costs will be minimal.  Back to Bloomberg:

“I think that people are feeling the implications of a Greek exit aren’t so bad,” Taylor said. If Greece leaves the euro, Europeans will “turn around and huddle together and say, ‘how do I help Portugal and Spain?’”

And Athens News:

Voters’ rejection of pro-bailout political parties in Sunday’s election has raised the chances of Greece leaving the euro, but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc.

Some banks have raised estimates of the likelihood of Greece quitting the euro. But after a year of investors shedding bonds issued by highly indebted euro zone countries and big injections of central bank cash, they said the damage could be contained.

And from CNNMoney:

 The results of the latest elections in Greece may make it more likely that the country will eventually leave the eurozone. But such an exit would probably be more orderly than Greece’s default, experts said….

…”[Greece] is not going to get pushed, but they might walk out,” Citi chief economist Willem Buiter said at last week’s Milken Institute Global Conference…

…Economist Nouriel Roubini thinks Portugal and Ireland may also find themselves restructuring their debt and could even wind up following Greece out the door, but none of that should prove disruptive to world markets.

“If a small country — like Greece or Portugal — exit, you can have an orderly divorce, but if that restructuring and/or exit hits Italy or Spain, effectively you could get a breakup of the eurozone,” Roubini said. But he added that’s an unlikely scenario….

The proximate cause for such optimism, I believe, is that the much feared Greek debt default failed to trigger a financial collapse.  Apparently, European policymakers kicked that can far enough down the road that financial market participants had time to adjust to that ultimate outcome.  That, in addition to the two LTRO’s and more firepower in other emergency funding facilities have perhaps created a sense of complacency about a Greek exist from the Eurozone.  And that complacency suggests that there will be no third bailout for Greece, especially if that means reserving resources for other ailing Euro members. No bailout renegotiations will likely tip the balance such that staying in the Eurozone will be more costly than exit.

Whether or not Europe should become so sanguine about a Greek exit is another question entirely.  But perhaps at this point such concerns are irrelevant anyway.  Unless economic conditions dramatically shift in a positive fashion in Greece, it is increasingly difficult to see how this ends with anything but a Greek exit from the Eurozone.

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