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Draghi Needs Greece Out to Succeed
Merkel said that Greece was going to stay in the Euro on Friday:
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Hollande said the same thing on Sunday:
Merkel added that all of the folks who have a seat at the table just shut up about Greece (This was a weird one to me):
I don’t get it.
To “fix” Greece, Greece must decouple from the Euro. There is no other option. It is only a question of when, how much it will cost and whom will pay. The EU deciders know that this is true; they just don't admit to reality in public. An important question to ask:
What are the implications to Mario Draghi/the ECB of “Merkande’s” public support for Greece staying with the Euro (and dying) for a few more years?
Draghi changed the game on 8/2 when he put the issue of “convertibility” (the risk of a return to legacy currencies) on the table. Markets have been reacting ever since he drew a line in the sand with these carefully chosen words:
Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.
Draghi shouts out:
“Don’t worry! No current member of the EU will leave! There will be no Euro breakup!
How can Mr. Draghi eliminate the risk of convertibility in the EU when the weakest sister in the EU has to be kicked out for its own good? “He can’t”, is the answer. Not when everyone (including the IMF) agrees that sustaining the Greek Euro link is impossible (and harmful to all).
As long as Merkel and Hollande talk nice about Greece, the convertibility issue will hang in the air. The market will continue to fret:
“What happens when Greece goes?”
or
“When Greece goes, does that mean Spain will too?”
The issue of Greece’s status must be resolved before the question of convertibility for the rest of the EU members can be laid to rest. Draghi can’t eliminate the risk until Greece is out, and the resulting fallout is contained.
Draghi is a market savvy guy. He knows he can’t stand in front of the capital markets and succeed unless he has a credible position that can be defended. Greece is the broken wheel of his cart. It has to be jettisoned before the other wheels have a chance to prove they can roll on their own. He says he wants to reverse the market psychology on convertibility risk, that can’t happen until Greece is gone.
The EU political leaders are screaming, “It’s all, or nothing!” That stance takes the cards out of Draghi’s hands.
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Note: My long held position is that the best course of action is for a Grexit. I do not believe that Grexit necessarily means Spaxit (or Itaxit). Too many years have passed in this story for a “crisis” to happen when the final chapter for Greece is written. It’s in the ‘print’ already.
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Ok, not being an expert in the field, I am wondering myself what would happen if Greece would default on its loans but remain in the Euro zone. Could we maybe do a Gedankenexperiment?
Let's say Greece defaults in a couple of weeks and adamantly refuses to leave the Euro. What happens?
1) Greece stops servicing its debt and uses what tax revenue it has to fund whatever Government programs it can afford and sees fit to fund.
1a) The Greek population would ... starve to death? feel relief? Go 'Mad Max' crazy? stone their politicians? really, completely, and absolutely stop paying their taxes and feel better for it? invade Germany (or where ever)?
2) Greek banks, insurance companies, mutual funds, and what have you would ... do what? go broke? Could Greece selectively continue to service debt held by Greeks (ignoring political fallout)?
3) Eurozone banks and other entities holding Greek debt would ... scream like wounded banshees, calling the Greeks nasty names and refusing to loan them money ever ever ever again? or maybe just say, "what the hell, I'm covered" and collect on their CDS? or run to their respective Governments sobbing that the bad Greeks didn't pay them?
4) Eurozone Governments would ... scold the Greeks for being bad? or maybe invade Greece? or cause Greek assets to be confiscated? or maybe send Greece humanitarian or development assistance?
5) The banks who wrote CDS on Greek bonds would ... go broke (would any U.S. banks be among them?)? just say, "oh, what a downer!" and write a check (possibly using "segregated" assets to do so)? Hire mafia hit men to take out certain politicians?
It would be nice if a more knowledgeable person could help here ...
Cool! a "Gedankenexperiment". Don't know if I count as "knowledgeable", but OK:
Let's take the assumption - Greece defaults in two weeks. btw, Parliament would have to agree with the President.
1) If you default you don't have any debt to service. This means 20% of tax revenues more. Poof! No deficit! Good, eh?
1a) We are talking about "sogging europeans" that would not let any population starve. Though for a while it's awkward.
2) No, not broke. But for a while cut off from the rest of the financial world. Though Russia and Cyprus would help immediately with that.
3) The whole financial world would be screaming, though I wonder if they can scream louder. The question is: do they ask for a naval blockade? For this, Uncle Sam would have to approve. And this would make the Russians really, really mad. They are already quite pissed because of Syria.
4) My take? Say "good riddance and all the best". The British would finally collect their bet money on "EuroZone Break!" and the EURUSD would go up to where I was expecting it. Way up.
5) Nothing a good Fed Infusion can't handle. Or perhaps we finally all realize those derivatives are "stoopid" and quite useless.
Of course the big problem last year was that many non-europeans had no idea how big or small the Greek case is. Then, it was much more dangerous.
The funniest thing? Greece could still use the EUR. Montenegro does that too, without being a member.
The Achilles' Heel of all this is Tourism. So good relations would have to be kept.
sounds uncomfortable, but doable, which is sort of my take as well. Greek politicians attending EU meetings would have to grow a thick skin, and might do well to attend meetings with their hearing aids switched off, but I mean, what the hell?
I don't see the other EU countries, or any other country for that matter, significantly sanctioning them.
Bruce - what badness do you see that would force Greece to revert to the drachma? Would the ECB amputate the Bank of Greece from the Eurosystem maybe?
And if Greece were to succeed in defaulting while remaining in the Eurozone, might it be an example for other countries?
Oh .. You think the fact that the Fed marks its PAPER gold certificates at $42 has any bearing on anything? They aren't even worth that much, becasue the Fed will never get the gold back. US gold is owned by the Treasury, not the Fed.
Besides, gold should not be marked to ANY price, except weight. Weight is the only denomination that matters.
The Fed is a custodian of about 16 tons of FOREIGN gold. The EU's gold they are so carefully marking to market is sitting in NYC under the direct control of the Fed. Will they ever get it back, or just more dollars?
Perhaps they will send it back in bombs!
whoa! freegolder, how do you dare to take my words out of my brain and challenge my position as chief EUR apologist! ;-)
may I point everybody to an excellent wiki article about the matter?
<http://en.wikipedia.org/wiki/Greek_government-debt_crisis>
it has grown in time and it still has a lot of - pardon the word, it's not meant as disparaging - bullshit from the AngloSphere, but it's really worthwhile, particularly the tables.
I note there, for example, that Greece's Debt/GDP was twice at 100%, once in 1996 with € 90bn and another time in 2004 with € 183.
Yes, both GDP and debt doubled in 8 freaking years. Lots of way to interpret this, including growing pains.
And yet, Greece and it's debt is not really the issue. Or, to be precise, it's an issue of roughly € 140bn, and this is not much in the current scheme of things.
The real issue is trust between the eurozone partners. And this is getting way better. And the ECB is doing quite a good job in this (I'm astonished, too, as an old fan of Trichet).
Fair enough. We don't agree. Time will tell on this one. I say Greece is out of the Euro in less than 24 months. Every month that we wait for this event, there will be more questions on convertability.
How long has it been now? Three years? Four? How much has it cost so far? What is the end game? (none)
You advocate the "muddle through" approach. Then muddle you will.
bk
I advocate the 'reality' approach Bruce, nothing more. And so does Europe. It seems everyone on ZH is a closet socialist though, as Europe is criticised for the inevitable GDP contraction and the pain of readjustment, whilst America/Japan/Britain are castigated for printing to oblivion. Well ZH and others, which is it to be be? It's somewhat laughable to criticise both approaches.
The Greeks are adjusting (and Spain etc.), Britain and America aren't.
Currency collapse awaits some, not others, that is the end game, bye bye mighty dollar.
I applaud the ECB for sticking to its guns, I weep for the American and British people, with their currencies heading for collapse to save the welfare state and the debtors.
Currency collapse or reality.
Oh, and after currency collapse comes reality by the way, but with savers wiped out.
Good luck.
You may want to change your screenname to FreeLoader so as to reflect your bias toward other freeloaders like Greece, Spain and Italy. These disfunctional welfare states need their own currency to devalue and must leave the EMU. And sooner is better than later-Greece should have been cut loose three years and many hundreds of billions ago. There is a fundamental CULTURAL difference in work ethic between southern and northern europe and its not new. Perhaps you believe running the Greek National railroad with wage expenditures of $400M EU and revenues of $100M EU/year is viable? Or having 40% of your "GDP" generated from the public sector is sustainable? You need to read Michael Lewis' "Boomerang" if you seek to understand the roots of the financial crisis in culture.
Ah, another ZHer who does not read widely, or have eyes to see what is actually happening in real life right now in these countries. Sigh, what hope do you have if you cannot see past ZH headlines?
Or perhaps you were a bondholder? property investor in Spain?
Don't be bitter, and rest assured that wherever you live in the world is in the same boat as Greece, but just doesn't know it yet.
Any idea on how to get the internal devaluation to happen? They are not willing to take wage and job cuts needed, so is there a magic way to internally devalue that no one else knows about?
Well, you are factually wrong, I suggest you read more, learn what is really happening:
http://www.guardian.co.uk/business/2012/feb/21/greeks-face-further-wage-...
http://www.usatoday.com/money/world/story/2012-02-28/greece-approves-cut...
Got anything that is more up to date, like proof the wage cuts have been implimented? That the alleged wage cuts are working?
Gosh, how lazy are you. Do your own research, I've done mine thanks.
Considering you linked 6 month old articles, one stating that the cuts are not enough, I'd say it's up to you to prove your original premise.
If you cannot be bothered to do some googling that is up to you, there's loads of recent stuff there too.
I'll not do it for you, and I have nothing to prove, as facts are facts.
Thought so...
Why do I bother?
http://www.setimes.com/cocoon/setimes/xhtml/en_GB/features/setimes/featu...
Idiot.
Obviously its the best thing for Greece to leave the Euro. God forbid Greece actually recover after leaving because then all the political elites in the EU structures would realize there worst fears. Imagine going to Greece and being able to go on holiday at 50% off the Euro v Drachma. The place would be flooded with vacationers from Europe and maybe a recovery could take hold. The problem all the European political elites who's job rest on the Euro status quo would have to justify to the rest of the Europe why they should stay in the Euro.
It's the debt, not the currency. Part of it is not convertible. The key issue is default or not default, or just cling on and wait.
They can still write Iceland off as a 'miracle' or explain it by it's small size etc. but they really can't afford to set a precedence inside Europe that would be contrary to their 'integration is good for you' dogma
Yep.
Greece can stay if Germany goes. If I were a German bank I would want an EFSF secondary markey bond-buying program to whom I could sell my PIIGS bonds, putting Euros on my home balance sheet. These get translated to DM and the Germans pay their EFSF tab in devalued Euros.
While I agree, what will this mean for the CDS "market". Will all those contracts simply be forgotten? Seems highly unlikely to me. Someone is on the other side of those contracts.
It's much bigger than the CDS contract Laws, like we saw with the Libor emails it's the bottles of champagne that back those contracts.
I don't understand why you think the other wheels would become viable, even when Greece goes, which it will.
I'm not sure they become viable. I said there would be fallout. It is possible that it can be contained if Draghi has a free hand. I am not at all sure he can do this, but he thinks he can.
I'm sure that there is not a chance in Hell for Spain, so long as Greece stays in the picture.
Most families have a few ne'er-do-wells. The rest of the family just has to pull a bit harder to make up. The Euro Zone is not unique in this regard. America has a few laggards among its "states" as well.
Honestly Bruce, you sound a whole lot more intelligent when you don't waste your time focusing on a political fix, for anything. The whole world is broken, by design, and all your analysis amounts to no more than determining the number of angels that can dance on the head of a pin.
Why would you ever allow yourself to be distracted by this wholly worthless endeavor? Draghi, et al., are nothing but puppets making noise until the collapse relieves them of their sophist duties (at which time, new and improved sophists emerge).
All you need to know about our future can be summed up in one idea, WWIII. Go on about the puppets all you want, just don't expect it to payoff (even if you do correctly define the script for a particular act).
"The whole world is broken, by design" - this is where you simply need to stop deliberating, there are no fixes because nobody has any interest in really fixing anything it's works as planned, what we need is a total collapse of the whole system period
Greece has to be kicked out to force discipline on Spain and Italy. It's a very dangerous, but necessary object lesson.
What is your guess and hope and premise, BK, is that 'Grexit' consequences are containable. Many people disagree, and it seems no one really knows.
Manageable and non-systemic like Iceland, or something that would create half a trillion in immediate losses, and then collapse the French and German banks and much of the world along with it?
The EU leaders are quite in fear that however bad it is to keep Greece in the euro, the alternative is much more catastrophic and expensive.
Another factor - covered by John Ward in 'The Slog' - is that there is apparently an offer from Geithner and the US that, if Greece leaves the euro, the US will step in with Yankee Bernanke Bux to prevent bond default, plus additional funds, in exchange for offshore Greek oil, Greek minerals, and increased use of Greece for US military bases.
We need more than 'hope' - we all need a better confrontation of the thorny question of whether a Greek massive default and exit from the euro would trigger a huge, catastrophic crisis or not ...
Consider, for example, the superb former ZeroHedge commentator Peter Tchir:
« ... Maybe I’m wrong, but every time I look at the possibility of a Greek exit right now I see it spiraling out of control and dragging down the entire global economy. I hear and read the arguments of why it is controllable and they just don’t seem credible. ... »
'Why a Grexit Would Make Lehman Look Like Childs Play'
http://trumanfactor.com/2012/why-a-grexit-would-make-lehman-look-like-ch...