Monday, 20 April 2015

Choice of Conium maculatum or Greek hemlock

Twitter: @andreaskoutras

In Plato’s Apology, Socrates the philosopher is condemned to death by poisoning. He was found guilty of corrupting the youth of Athens and impiety towards the Gods. Drinking the Conium maculatum or hemlock was the poison of choice. The Greek government and the Greek people are luckier in two respects. Firstly, they have a choice of three poisons and secondly, they don’t have to, like Socrates did, reject the offer of escaping death.

Poison 1. U-turn or submission

This is the scenario whereby the Greek government stops messing about and gets down to the real meat of these negotiations. On the 20th of February Syriza signed to abide by the Memorandum of Understanding but have done nothing since then. On the contrary many of the things could be construed as unilateral actions something that was singled out by the agreement.

Why is this poison? Well, the problem is that most of Syriza is against any deal that would include privatizations, labour market reforms and pension reforms. Tsipras was so afraid that his agreement on the 20th of February would be voted down that he did not bring it to the parliament for a vote. The Finnish did, but not the Greeks!! When it was presented to the party MPs, 30 voted down the deal and 30 left the room in order not to vote out of 149. In other words the party thinks differently.

Thus a U-turn by Tsipras may result in breaking the party or even losing power. Already prominent government members call for a referendum or elections. And all of these shenanigans just for an interim solution that is going to take Greece to June when they will need to sign a new memorandum of understanding with Europe and a new bail-out package of around 30-40billion.

Poison 2. Default inside Eurozone. Use of ECB tools.

Most of the market thinks in simple terms. For example if Greece does not agree then Greece is out. This is not however how Europe works. European solutions are never three course meals but soups of everything. Europe has gone a long way in establishing tools and procedures to deal with financial implications of problematic countries or Banks. Since 2010, the Treaty of the union was changed to accommodate bailout mechanisms like the EFSF and ESM. We have established a single banking union with single resolution mechanism etc. However, not much has been done in the way of political union and how to handle problematic countries. We are thus of the opinion that Greece is not going to exit the EZ even if it wants it. The alternative is to default inside it or to be pushed to a default in order for the existing tools to function. For example, the ECB may stop the Target2 once it reaches a predefined limit. In this case, Greece would be financially isolated till it complies. However, this would be highly political so we give it small probability of happening.

More likely another scenario would unfold.

  1. Greece misses a payment. But instead of saying that they intent to pay and that they exercise a grace period, they boast that they stuffed the bad Germans and the ugly Europeans and the inhuman IMF.
  2. This amounts to a declaration of moratorium and non- payment. In this case the ECB would have little room to manoeuvre. The guarantees given the Hellenic Republic are no good and as a result the Greek banks that borrow using them are insolvent. There is a bank holiday for a week while politicians try to find a solution. The threat is credible and real. The central bank would enforce a haircut on all Greek depositors as there are not enough over 100k deposits to cover the losses.
  3. The government then faces the dilemma of losing the deposits i.e. the voters and the power. If on the other hand they bow to the pressure, they could possibly survive by implementing the Memorandum. In this scenario, capital controls would be implemented for a long time. Whether the government survives or a new national unity government is formed is open to question.

Poison 3. Exit from the Eurozone.

If, on the other hand, the Syriza government continues to resist then the prospects of a Euro exit become more probable. This can come about either through elections in which people vote for it or through Syriza’s decision not to accept the MOU under the default inside the Euro scenario.

It is not easy to predict how a Eurozone exit can be implemented in this case. It is not going to be an amicable separation like the one I discussed in a previous note but a messy one. Europe needs to come up with new tools and legislations very-very fast.

European ECB Tools

In any case, it looks that Greece and Europe would face very soon a tough choice. For the Greeks it would be much tougher though. Europe has already prepared for any financial fallout. Draghi has already alluded to the ECB’s response. He mentioned using the OMT and the QE programs in order to save the union. One can think of the QE as a program to kick start the economy and the OMT as the ultimate program to save the union. If Greece decides to default inside the EZ then the tools of the ECB can place severe constraints on what any government can do.

Socrates was given the chance to escape. Crito offered to save him and tried many times to convince Socrates to escape. Socrates refused. Similarly, the Greek government has been offered many escape routes like “the extend and pretend” but so far they have refused. A major difference is that Socrates was acting on his behalf while the Greek government is acting on behalf of all Greeks and history.