This weekend’s Greek elections are the focus of intense speculation with market participants – and, so we are told, global central bankers – preparing for the worst. I am not quite sure that Greece should be such a focus at this point. I think Kiron Sakar over at The Big Picture is on the right track on this one:
The reality is that Mr Tsipras wont be able to negotiate a better deal (he is delusional) and if he is in power and maintains his current position, Greece will be out of the EZ pretty soon thereafter. If New Democracy wins and can form a coalition, there will be some give from the rest of the EZ, but the Greeks will never deliver, which suggests to me that they will be forced to exit, but a little bit later.
That sounds about right; Greece is pretty much a lost cause at this point, regardless of this weekend’s outcome. And worrying about contagion from Greece is just a little too late. The story is now Spain, whose ten-year yields brushed up against 7% today. And Italy, who sold three-year debt at 5.3% and ten-year yields above 6%. And increasingly you hear France as well. This has gone way beyond Greece at this point.
Meanwhile, the ECB remains on the sidelines, reportedly waiting for European fiscal policymakers to make the next step. According to Nouriel Roubini from his frequent emails:
If EU leaders could formulate, and demonstrate commitment toward, a clear plan to achieve a full fiscal, banking and political union that would also involve debt mutualization, the ECB would be willing to take appropriate policy actions to promote this integration and provide a bridge toward a broader union. A successful strategy would entail less front-loaded fiscal austerity and structural reforms; a growth compact that is substantial and not just cosmetic; a full banking union, starting with EZ-wide deposit insurance; and fiscal union and debt mutualization in the EZ.
Well, that’s pretty much asking for heaven and earth, isn’t it? I don’t see how the Europeans are going to pull that together before their summer vacation. And I can’t see that France lowering the retirement age to 60 is going to help – it won’t exactly help ease German fears that a fiscal union will be little more than a mechanism for Germany to fund the rest of Europe. And regardless of the French move, Germany remains something of a stick in the mud. From German Chancellor Angela Merkel, via the FT:
In a restatement of the limits to German action in tackling the debt crisis, she reeled off a list of unacceptable demands from other countries – including the US and UK – for “big bang” solutions to solve the crisis.
They included jointly guaranteed eurozone bonds, which she described as “counter-productive” and illegal under the German constitution, as well as a publicly financed European bank deposit insurance scheme, and France’s new call for a “financial stability package”.
Merkel is right about one thing:
“Europe has set out to complete economic and monetary union,” she said. “Here we are certainly in a race with the markets.”
I hope she does have a workable scheme up her sleeve, because as it looks right now, she is in a race she can’t win.
I don’t think you two are seeing things right. Tsipras will have control over Greek domestic policy. This is not a negotiation as you imagine between equal parties. It’s between unequal parties, but the weak party in this case has control over its domestic policy. He can make a deal with Merkel that says, we will continue servicing our debts as best we can in the context of the bailout, but we will change course on domestic policy. If Merkel rejects this overture (i.e. if she refuses to fund the bailout), then Tsipras prioritizes domestic policy over debt. At that point, anything goes. Greece will have to be forcibly ejected in what will be interpreted as a hostile move (i.e. Greece’s banks will no longer have access the the European Target2 clearing system). Once people in Spain realize that Greek banks have been taken out in such a fashion, this will spark a bank run.
Either way, Tsipras is the realist. Greece can’t pay back the loans and the 34% cut in the budget is cratering the Greek economy (which is practically dead) even more.