A week ago, we said the following [11] about the situation faced by Greek PM Alexis Tsipras when he and his new finance minister arrived in Brussels for the final round of bailout negotiations earlier this month:
...the entire world looked on in horror as Alexis Tsipras - who just days earlier secured a crucial referendum victory which by all accounts empowered him to ride into Brussels a conquering hero - was eviscerated by German FinMin Wolfgang Schaeuble and several like-minded EU finance ministers who smelled blood after Greece submitted a proposal that betrayed the Greek PM’s lack of conviction.
In short, Tsipras made a fatal error. In an act of alarming defiance, he boldly called for a referendum on creditors’ proposals, campaigned for a "no" vote, and then, once 61% of the Greek populace gave their leader a mandate to reject more austerity, he proceeded to resubmit the very same proposal Greeks had just voted against. That told EU officials that Tsipras had no intention of leveraging the referendum outcome and from there, the "mental waterboarding" was on.
Now, Greece is stuck with a deal that promises more of the same austerity measures that have so far served only to prolong an intractable recession and indeed, without some manner of debt relief or re-profiling, the new program has no chance of success.
Given all of this, it isn’t surprising that economists are once again beginning to talk about Grexit, and indeed, who can blame them? It’s difficult to take seriously the idea that the new "deal" has taken a Greek exit off the table when German FinMin Wolfgang Schaeuble still claims that a Greek exit from the EMU might be the country’s best chance at a "classic" haircut and economic recovery. Here’s Bloomberg with more [12] on why Grexit is "back on the agenda":
Don’t pack away the currency presses just yet, Greece’s euro exit may be back on the table next year.
There’s still a danger that Greece will be forced out of the euro region by the end of 2016, according to 71 percent of respondents in a Bloomberg survey of 34 economists. Seventy percent said they reckon Greece should be safe for the rest of 2015, though almost half said they thought the 86 billion-euro ($93 billion) bailout package Prime Minister Alexis Tsipras is targeting will prove to be too small.
While Tsipras is checking off the requirements to qualify for a third bailout, the flaws in the agreement he hammered out with euro-area leaders last week are fueling concerns that Greece will struggle to implement the three-year program.
The European creditors are refusing to firm up their commitment to restructuring Greece’s debts, a move the International Monetary Fund says is essential for the country to stabilize its finances. There are also doubts about the 50 billion-euro target for asset sales and, more fundamentally, the merits of forcing more austerity on a shattered economy.
'Without some form of debt relief, the package will never be big enough," Peter Dixon, a global economist at Commerzbank AG in London, said in his response to the survey. "Loading additional loans onto a country which cannot afford to repay them corresponds to Einstein’s definition of insanity: Trying the same thing over and over again in the expectation of different results."
“Apart from Germany, it appears that most people are in agreement that Greece needs a substantial debt writedown," said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. "Unless they get it, it is hard to see the country surviving within the euro zone indefinitely."
Well, no. It’s not that Germany isn’t in agreement about whether Greece could use a debt writedown.
In fact, Schaeuble explicitly acknowledged [13] that Athens needs debt relief less than a week ago. For the Germans it isn’t about whether Greece needs a writedown, it’s about whether Greece will get a writedown, and as long as the country remains in the currency bloc and Germany still holds the purse strings, there will be no haircut for the Greeks.
If, however, Greece were to take Schaeuble’s "time-out" from the euro, Germany has hinted writedowns might be possible and that, in and of itself, shows that indeed, the idea of a Grexit has by no means been confined to the annals of European history.
Here with more on all of the above including Tsipras’ tactical error and the country’s inevitable break with Brussels is Eurointelligence’s Wolfgang Münchau:
Originally published in FT [14]:
Alexis Tsipras should never have hired Yanis Varoufakis as his finance minister. Or he should have listened to him, and kept him on. But instead the Greek prime minister chose the worst of all options. He followed Mr Varoufakis’ advice of rejecting the offer of the creditors — until last week. But having done this, Mr Tsipras committed a critical error by rejecting Mr Varoufakis’ plan B for the moment when the country’s banks closed down: the immediate introduction of a parallel currency — IOUs issues by the Greek state but denominated in euros. A parallel currency would have allowed the Greeks to pay for their daily transactions when cash withdrawals were limited to €60 a day. A total economic collapse would have been avoided.
But Mr Tsipras did not go for this, or indeed any other plan B. Instead he capitulated. At that point, he was no longer even in a position to choose a Grexit — a Greek exit from the eurozone. The economic precondition for a smooth departure would have been a primary surplus — before debt service — and an equivalent surplus in the private sector. Greece has no foreign exchange reserves. If the Greeks were to reintroduce the drachma, they would have had to pay for all of their imports with the foreign exchange earnings of their exports. These minimum preconditions were in place in March but not in July.
So, like his predecessors, Mr Tsipras ended up with another very lousy bailout deal. And this one suffers from the same fundamental flaws as its predecessors. This leads me to conclude that Grexit remains the most likely ultimate outcome after all.
There are three principal ways in which this can happen. The first is that a deal is simply not concluded. All that was agreed last week is for negotiations to start, plus some interim financing. A deal might fail because principal participants themselves are sceptical. Wolfgang Schäuble, the German finance minister, says he will keep up his offer of a Grexit in his drawer, just in case the negotiations fail. Mr Tsipras denounced the agreement on several occasions last week. And the International Monetary Fund is telling us that the numbers do not add up, and that it will not sign unless the European creditors agree to debt relief.
A more likely Grexit scenario is that a programme is agreed and then fails. The Athens government may implement all the measures the creditors demand, but the economy fails to recover and debt targets remain elusive. Mr Tsipras already agreed last week that if this situation arose, he would pile on more austerity. So, unless the economy behaves in future in a very different way from the way it behaved in the past, it will remain trapped in a vicious circle for many years to come. At that point, Mr Tsipras, or his successor, could concede defeat and opt for a negotiated Grexit as the least painful option. Grexit could also be forced on them by the creditors.
My own most likely Grexit scenario is a different one yet again. Donald Tusk, the president of the European Council, hinted at this in his interview with the Financial Times last week when he said that he felt "something revolutionary" in the air. He is on to something. The most probable scenario for me is Grexit through insurrection.
In other words, after suffering untold humiliation at the hands of creditors, Greeks will eventially be pushed to their breaking point.
Scavenging through the trash for food [15], lining up at banks to receive rationed [16] euros, scarcities of imported goods - eventually enough will be enough. Once Greek society reaches the tipping point, a popular revolt - an "insurrection" or "something revolutionary" - will follow.
At that juncture, officials in Brussels will proceed to the 13th floor of the Berlaymont building, open the safe a few meters down from EU President Jean-Claude Juncker’s office, and dust off the Grexit "Black Book [17]."
Next, the streets of Athens will "fill with the sounds of tanks."
