Monday 12 September 2011

Europe implicitely asks Greek PM to go.

  • Greece announces one more tax raid to plug the hole in the budget as the estimated deficit jumps to 9.5% from the 7.6% forecasted for 2011.
  • European leaders barking at Greece
  • Scenarios going forward
It should by now be very clear that every time we are approaching an installment, Greece would start kicking and the European leaders/lenders would start shouting verbal abuse. In addition, there would be the customary rumors regarding Greece exiting the Euro, declaring default over the weekend and the seven plagues visiting Greece together with the Troika inspectors.
I am surprised, by the inability of the market to comprehend that the European Union is just a babel of views and that it should not pay attention to what they say but what they can or cannot do. With that in mind, can we seriously estimate the cost of Greece proceeding with a disorderly default and possibly exit from the common currency? I think not, at least not in the near future. It is not a question of morality or whether it is right or wrong to punish the non-compliant Greeks. Morality exists only in humans and not in states and right or wrong never enters a political calculation. It is rather the monetary consequences to the European Financial institutions, the ECB and the Global economy.  Then we have the social consequences in Greece and across Europe. The philosophical ideal of a united Europe would suffer a blow and the notion that we have a German led coalition of northern countries against the south would gain credibility. In short, other countries not having similar problems might think of leaving the Union or not entering at all. After all, this is supposed to be a Union of willing partners and not vassalage. 
I therefore find the market’s reaction slightly over the top and that the most likely outcome to the current mess is a compromise and more time-buying.

Greek PM has become part of the Problem.

Watching the PM’s speech in Thessalonica was a painful ordeal. The market was expecting some mood changing announcements and instead they got the usual Greek rhetoric. The PM seems to have forgotten that the speech’s audience was the European politicians and the markets and not the Greek public. He reiterated the usual “we shall fight on the beaches” and “we will do whatever it takes” slogans coupled with the customary attack on the conservative opposition.
Mr Papandreou came to power proclaiming to Europe and the rest of the world, that he was the “Good” guy and that he is the one that should be trusted to get Greece out of the mess. European leaders not having an alternative believed him. Instead, he became the Great Deceiver. He promised time and time again that he would stick to the memorandum only to buy more time and bailout money. Unfortunately, he overplayed his hand and miscalculated the opposition. The European leader’s recent change of heart reflects this shift in their opinion of the Greek government. The argument, frequently employed by Mr Papandreou that he cannot do more was demolished, when, after procrastinating for 12 months, in one day he managed to move assets for sale. The tax raid announced in haste over the weekend shows the panic and the inability of his administration to grasp the urgency of the situation. They could have implemented this way back. Mr Papandreou has now become part of the problem and not of the solution. Whatever credibility he had outside Greece has probably been lost and increasingly, it looks like the sooner Greece forms a national unity government with sweeping powers the better. 
European Shift

One could not fail noticing that after the gross miscalculation of kicking the troika out of Greece by Mr Venizelos (finance minister) and Mr Papandreou, Europe’s view changed significantly. Now, it is politically profitable to bash the unruly Greeks and issue uncompromising ultimatums. So, it is fun to watch various European countries employing the bad cop, good cop policy. One unnamed official informs the markets that his country prepares for Greece’s exit from the euro while another reiterates the resolve of his country to save the EU. This carrot and stick policy however, only damages the credibility of the EU. These, damaging statements mostly come from the northern European members of the EU.
The problem, however, is that many European citizens disagree with the path that the EU has taken and find Greece an easy target to voice their anger.  Greece is slowly becoming the scapegoat of Europe’s failed integration.


Many European politicians stated that Greece would not get the next instalment unless and until they fully comply with the demands of the Troika. They can afford to say that since there is no imminent Bond redemption and Greece without this instalment would run out of money to pay salaries and pension by early October. This is a credible threat to the Greek government and is aimed directly at squeezing the Greek government, possibly hinting at a National Unity administration. Thus:
1.     Greece scrambles some more tax raids and structural changes together that give enough reason for the Troika to release the next instalment in time. This is the good scenario for the markets and the more probable one. Greece survives to fight another instalment and PM Papandreou survives few more months, unless he is brought down by civil unrest and internal party coup.
2.     Greece’s response to the demands of the Troika is inadequate and the next instalment is not released in time. The Greek government would somehow have to find money to pay pensions and salaries. They can do that with some extraordinary measures:
a.     They could pay a minimum pension/salary with the rest owed. They may even limit withdrawals from banks to a minimum. This is a high risk path as it would cause panic.
b.     They could extend the ELA (with or without ECB’s agreement, we do not know) to give extra few billion to the Banks, which in turn they lend them back to the Government to pay salaries.  This seems to be an alternative but it may cause political friction between the ECB, Greece and the EU.
c.     A white knight appears in the form of Chinese (say) or other money-lenders.If the money is not found in some way, then most likely the Greek government would have to resign and some form of transitional administration or National Unity government takes place. This is where it gets scarily volatile. Would this transitional administration take Greece out of the Euro? I believe not. Most likely, it would accede to Troika’s demands pass emergency legislation and implement the changes. This may not be as bad as it sounds given the circumstances.
If on the other hand they decide that life is better without the common currency, then banks would have to close for some time for the transition and civil order would have to be imposed by extraordinary means. I find this last scenario extremely unrealistic.
3.     Troika releases only enough money to pay the Bonds maturing but no more. Technically then Greece does not default on their international obligations but still have to find the money for salaries. See scenario 2.
4.     Troika refuses to give any more money either for Bond redemption or for Greece to pay salaries and pensions. This scenario is the nightmare default scenario. It depends however, on the timing. If this happens before any PSI implementation then the potential haircut could be substantial. Most Greek bonds are under Greek law, and by act of parliament they can make them zero coupon (say) and negotiate a 90% haircut (say). This would be disastrous to European financial institutions and to the ECB which owns 45billion of the Greek debt. Furthermore, Greece may be forced to issue a new or parallel currency to pay of domestic liabilities. It really gets very messy, and the risk is that Greece becomes a truly failed state. Europe did this mistake once in Yugoslavia, it should not be repeated in Greece. If anything like that happens then we are potentially looking at the unwinding of the European dream. This is too high a price for Europe to pay.