At long last the deniers have thrown in the towel. Grexit is now the base
case as Europe Braces for Messy Greek Endgame.
It’s still possible that Greece can remain in the
eurozone—though that is no longer the base case for many policy makers. At
the very least, most fear the situation is going to get much, worse before it
gets any better. No one now expects a deal to unlock Greek bailout funding at
this week’s meeting of eurozone finance ministers in Riga—originally set as
the final deadline for a deal. The new final, final deadline is now said to
be a summit on May 11.
But among European politicians and officials gathered in Washington DC last
week for the International Monetary Fund’s Spring Meetings, there was little
optimism that a deal will be agreed by then.
The two sides are no closer to an agreement than when the Greek government
took office almost three months ago. “Nothing, literally nothing has been
achieved,” says an official. In fact, it is worse than that: so far, the bulk
of Athens’s reform plans would actually cost money or reduce government
revenues, according to eurozone officials.
They say that when you add up all the government’s proposals, the budget
surplus required under the current program turns into a 10-15% deficit while
debt soars far above the 120% of GDP targeted for 2022. There is no way that
the eurozone—let alone the IMF—could disburse funds on the basis of such
fantastical numbers.
The bottom line is that Athens won’t get any money unless it can reach a deal
that satisfies the IMF that Greek debt is on a sustainable path and that it
has a medium-term funding plan in place. The eurozone won’t disburse its own
bailout funds without a deal that carries this IMF seal of approval.
Likely Scenario
The likely scenario is exactly the same as it was in 2010, 2011, 2012, 2013,
and 2014: default.
Various can-kicking exercises simply lasted that long.
So why now?
- The election of Syriza
- ECB belief that Grexit will not cause contagion.
Bear in mind, Grexit could cause a very messy breakup for the eurozone. That
doesn't matter. What matters is belief. As long as the ECB thinks it has the
"tools" to prevent major problems, then it will be prepared to let
Greece go.
Greece's Varoufakis Warns of Grexit Contagion
Reuters reports Greece's Varoufakis Warns of Grexit Contagion.
Greece's Finance Minister Yanis "Some claim that the
rest of Europe has been ring-fenced from Greece and that the ECB has tools at
its disposal to amputate Greece, if need be, cauterize the wound and allow
the rest of euro zone to carry on."
"I very much doubt that that is the case. Not just because of Greece but
for any part of the union," he said, speaking in English.
"Once the idea enters peoples' minds that monetary union is not forever,
speculation begins ... who's next? That question is the solvent of any
monetary union. Sooner or later it's going to start raising interest rates,
political tensions, capital flight."
His comments were recorded before those of Mario Draghi, the European Central
Bank's president, who this weekend said the euro zone was better equipped
than it had been in the past to deal with a new Greek crisis but warned of
uncharted waters if the situation deteriorates. said in an interview
broadcast on Sunday that if Greece were to leave the euro zone, there would
be an inevitable contagion effect.
Contagion?
One problem for Varoufakis is that no one believes him. They believe Draghi.
Will there be contagion? It's not a given but it's likely eventually,
arguably later than sooner.
For example, if Greece exits the eurozone, then gets its act together on
reforms, its economy will recover must faster that if it stayed in the
eurozone. Shedding of debt obligations will do wonders, if handled properly.
In such a scenario, a choir of voices in Spain, in Italy, in Portugal, and
perhaps even France will seek the same opportunity.
The eurozone fear should not be that Greece blows up, but rather that it
doesn't. That will take some time to sort out. Grexit will be no overnight
miracle for Greece, so no exit contagion, but there will be other problems
for the eurozone effective immediately, including shared responsibility
percentages for Greek debt.
Shared Liabilities in Billions of Euros
click on chart for sharper image
Liabilities from http://www.cesifo-group.de/ifoHome.html
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot
