Celebrating the Occasional Posts of Mr. Cook!

Month: June, 2015

Grexit Update

Short Post:

Greece has requested a 29.1 billion euro loan from the European Stability Mechanism. Given that such a loan would probably take more than a month to negotiate, require similar conditions to the ones Greece is currently rejecting, and the debt payment is due today… I think it is safe to call this a red herring.

What is all the more remarkable is how uniformly people across Europe and Greece are against Grexit. Virtually no one outside of members of a few conservative groups have come out for it. The pain Greece would feel from Grexit would be great. And yet, this seems to be where we are headed. I suppose the saying that a committee can make a decision dumber than any of it members comes to mind…

The options should be Greek reform underwritten by billions of euros from the Eurozone, or Greek reform underwritten by Greek hardship. The second gives Greece the right to chose its own system and removes the Europe-wide uncertainty we are experiencing. The former would certainly be more comfortable for Greeks and likely force more reform, if not the right kind of growth-enhancing reform Greece needs. But sometimes the hard road is necessary. Hard roads for hard heads, I suppose. And there are a lot of hard heads currently making decisions in Athens.

On the popular opinion front I am impressed with the level of recognition we are seeing in the European media that the Eurozone loans were largely wasted and will never be fully repaid, but I still feel the train wreck that Alex Tsipras has set in motion will prevail. It sets the agenda, if you will, and leaves a choice of yes or no. That does not leave much room for further negotiation. It leaves none, and based on media reporting Greeks do not sound as worried about the implications of a no vote as they should. What should be a referendum expressing a nation’s rejection of austerity in favor of a more effective prescription (growth-enhancing reforms and investments such as cutting red tape, reducing inefficiencies, and fostering entrepreneurship) is instead an in/out vote on the euro, framed by the Tsipras government as a negotiation tactic. Clearly there is a great deal of foolishness to go around in this saga. At least Grexit will force the hard choices that Tsipras currently rejects making. What will be especially interesting is what happens after the first default. As several economists have pointed out, there is no actual mechanism to force a country out of the euro. Tsipras does not actually want to go. It could get messy.


Grexit: It’s Happening

Short Post:

When one party becomes fed up with the other party in a relationship, cooperation becomes difficult. When said offending party is convinced that he or she need only play a better game of Chicken and the other party will fold, and this is not the case… well, let’s review the game. In Chicken, two cars are driven straight at the each other and the first driver to blink/swerve away is the loser. In this game between the (solvent) nations of the Eurozone and Greece, Prime Minister Alexis Tsipras has effectively decided that unbolting the steering wheel and tossing it out the window will bring Greece victory over its creditors. While a bold strategy, it unfortunately ignores the reality that what the Eurozone leaders are in fact driving is a train.

Little details like that are important when you play games at this level.

I suppose it is possible that the Greek voters will chose to accept the offered terms on July 5th. However, that does not seem to be the national mood. Everyone wants done with this unpleasant state of austerity and brinkmanship, Eurogroup leaders included. Greece cannot repay the hundreds of billions of euros she owes. While an argument can be made that five years of austerity politics and no growth have done an adequate job of reducing Greek wages for Greece to be economically competitive, a Greece running its own currency would do still better. As long as Greece is in the Euro, it will lack a key fiscal tool its economy needs. Nor is Greece willing to accept control of its public policy in exchange for the massive cash injections it would need to remain in the Eurozone. Unless the unpleasantness of the next week after the June 30th IMF default is enough to make Greeks change their minds or European public opinion leads the Eurogroup to blink, on June 6th Greeks will return to the drachma. For a preview of that, Iceland in 2009 shows how things could look. Or worse – Iceland just owed a lot of money. Greece has more fundamental systemic issues to deal with as well.

I doubt that Greece will exit the EU, though. There is no reason outside of spite for that. Greek should be in the EU. It should never have been in the Eurozone. This will be a harsh corrective, but as the saying goes, there is no time like the present.