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Grexit - will it happen or not?

matthewr said:
Given the amount the economy has already contracted and the amount of contraction predicted in your anonymous three year old quote and the almost universal way that economies go after massive recession and currency devaluation, then it would seem highly unlikely that Greece would be anything but booming 3 years after an exit.
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Quote is from Wiki, but the study was undertaken by the National Bank of Greece.

Massively rising import prices and recession added to cripplingly high rates of inflation as the govt, short of revenue, and a shrunken financial sector would be forced to print money. I think it is impossible to say how things would go after that, but I think it would take longer than 3 years to have the economy growing rapidly.
 
The odds of an exit have increased massively in recent months and particularly in the last few weeks. I would say more than 50%, perhaps 60%.

The strange part is it all seems quite avoidable. The elements of a deal have not changed: continued cash support of the Greek banking system in exchange for reforms. The existing debt would continue to be fudged (extended, rolled over, whatever) to preserve appearances and Greece would get rid of some of the more negative aspects of its system such as tax avoidance, cronyism and corruption in order to live within its means (i.e generate a surplus, eliminating the need for further debt). Despite some of the rhetoric Syriza had a chance of achieving this. They have blown it to a point that makes you wonder whether that was not their intention all along.

Beyond the strange negotiation tactics of Varoufakis there have been several constants in this negotiation: the refusal of the Greek government to give up on some parts of its electoral promises, such as re-hiring thousands of public sector employees that had been dismissed by the previous government, and their insistence that a big debt write-off was necessary. This last bit is quite strange as Greece's current cost of servicing its debt is no higher than Italy's and lower than Spain's. A further debt write-off was of such paramount importance to the Greeks that they were willing to wreck the negotiations in order to achieve it. The big advantage of a debt write-off is that it it reconstitutes your borrowing capacity, which seems to have been Syriza's intention all along. The Greek economy is obviously incapable in their view of generating a surplus: only regular infusions of foreign cash can keep the show on the road in the style the Greeks have become accustomed to. This is of course not to minimize the hardship experienced by some Greeks, but it is difficult to sell to the Latvians, Portuguese, Estonians and other East Europeans with lower income, lower pensions etc. who would be called upon to finance the Greeks.
 
Don't forget that the EU is in this mess partly because the politicians have chosen to break their own legally binding treaties i.e. No bail out, no transfer union. Greece would probably have suffered less had it been allowed to drop out of EMU in 2010; but this was too risky for certain French and German banks and too difficult for the EU leadership to admit that their Euro project was not perfect and permanent.

I don't see how yet another deal will avoid a Greek exit from EMU; it might delay it for another year or two at most.

I had an interesting discussion with the owner of a large German company in Hamburg yesterday, whose view is that the only solution will be for Germany to accept that in the interests of EU political unity, it will have to agree to permanent transfer arrangements to subsidise the poorer members in EMU; but that this will have to be accompanied by common fiscal policy under a single EU govt in Brussels. Of course this assumes that all EU members will be willing to end being nation states; and that Germany will always be rich enough to pay the bills.
 
When discussing what did/should have happened, and the consequences for a default, it's usually worth looking at what happened in Iceland, as it basically runs counter to most of the expectations.

Although a default sounds like it'll rip the bottom out of the bond market, what actually happens is that speculators see a sustainable realistic plan for recovery, and let's face it, we all want to jump in at the beginning of a recovery and get good returns on investment. If they default, pull out of the euro, and get some sensible plans in place, i'd expect a recovery driven by foreign investment to be quick in coming.

So if I were involved in the greek government, i'd be looking to see what I can do to attract investment post default and grexit. They will need a decent banking system though, i'd have thought some reform in this area would be necessary. Again, learning from iceland i'd suggest.
 
It saddens me personally that everyone sees this in purely monetary terms.

Bonds. Markets. Repayment. Deficit.

No one seems concerned about the human cost and the potential impact that could have on the stability of the region let alone the lives of perfectly decent hard working people who just want to live their lives and look after their families.

Everything these days appears to be reduced to a commodity.
 
Because they are intrinsically linked. IIUC, Greece imports way more than it exports. So if Greece was to default and exit the Euro, a much devalued Drachma will make their imports even more expensive so their current standards of living will be compromised....for a time at least.
 
Cesare said:
When discussing what did/should have happened, and the consequences for a default, it's usually worth looking at what happened in Iceland, as it basically runs counter to most of the expectations.

Although a default sounds like it'll rip the bottom out of the bond market, what actually happens is that speculators see a sustainable realistic plan for recovery, and let's face it, we all want to jump in at the beginning of a recovery and get good returns on investment. If they default, pull out of the euro, and get some sensible plans in place, i'd expect a recovery driven by foreign investment to be quick in coming.

So if I were involved in the greek government, i'd be looking to see what I can do to attract investment post default and grexit. They will need a decent banking system though, i'd have thought some reform in this area would be necessary. Again, learning from iceland i'd suggest.
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I think the parallels between Iceland and Greece are not very useful. Very different economies and very different people. The critical bit is your clause about having sensible plans in place.

Even if Greece were to default on 100% of its debt, it would still need to pay pensions, civil servants etc. and to do this regularly (every month would be good). This is why the primary surplus number is so important: not as a way of refunding the country's considerable debt, but as a way of ensuring that the country can keep the lights on after defaulting. Greece will need short term cash and will need to attract new lenders. If they can't demonstrate that they can reliably generate a surplus before interest costs, nobody will lend them anything.
 
PsB said:
I think the parallels between Iceland and Greece are not very useful. Very different economies and very different people.
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The people bit seems to be the most important. It's all well and good if the likes of Krugman hold up Iceland as an example for Greece (and perhaps Ireland, even though it's obviously too late for Ireland to think about leaving the euro), but from what I read Greece is as close to a failed state as a member of the EU has ever been. So unless there is a change of fundamental attitude, of being willing to pay taxes and play by rules (both for the elite and the Greek from the street), then I can't see Greece prospering, whether it stays in the euro or not. Quite disheartening, really.
 
I don't see what the problem is.
Betfair have the Greeks to leave the Eurozone on 2015 at 9/4.
All the Greek govt have to do is borrow like hell, lump on everything they have and then leave the Euro.
Collect the winnings and pay back the creditors.
Simples.

Easy this capitalism game.
Winners and Losers
 
gassor said:
Coming out of the EU would be catatrophic for the Greek people as their whole financial system would crash. Ukippers and Tory sympathisers should take note.
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It would be painful to begin with but in reality it is what Greece needs to do, go back to their own currency and start rebuilding their mainly tourist and agricultural economy, however the EU will not let them leave as it will expose the euro for what it is and the EU may start to implode, which is why so much money has been wasted trying to hold the whole system up.
I don't think Greece wants out of the Euro to be honest, but I hope they do leave the euro and show to the rest of EU members how much better off they will be. Can they be any worse off really?
 
Markus S said:
The people bit seems to be the most important. It's all well and good if the likes of Krugman hold up Iceland as an example for Greece (and perhaps Ireland, even though it's obviously too late for Ireland to think about leaving the euro), but from what I read Greece is as close to a failed state as a member of the EU has ever been. So unless there is a change of fundamental attitude, of being willing to pay taxes and play by rules (both for the elite and the Greek from the street), then I can't see Greece prospering, whether it stays in the euro or not. Quite disheartening, really.
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Quite. The other side is that if Greece is able to subject itself to the discipline of maintaining a primary surplus (which it will have to do anyway if it defaults), then why wouldn't it try to do this as part of the Eurozone? This would avoid wiping out a good chunk of the wealth of those people (primarily poorer people) that have not been able to move their money abroad. The argument that exiting would improve the competitiveness of the Greek economy is somewhat weak IMO: tourism has done very well in the last few years within the eurozone, and Greek hotel owners are putting their prices up at the moment, not down. Other export sectors are small relative to tourism.
 
merlin said:
It saddens me personally that everyone sees this in purely monetary terms.

Bonds. Markets. Repayment. Deficit.

No one seems concerned about the human cost and the potential impact that could have on the stability of the region let alone the lives of perfectly decent hard working people who just want to live their lives and look after their families.

Everything these days appears to be reduced to a commodity.
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Well, since this is a financial crisis it is being tackled in financial terms. Nobody is ignoring the "perfectly decent hard working people," but these people exist everywhere, including European countries like Portugal with a lower standard of living than Greece. Greeks will have to accept Portugal, rather than Italy or France, as their benchmark of what is a "normal" standard of living. A standard of living, after all, which was considered "normal" in Italy, the UK and France 30 years ago, and might become "normal" again in the future depending on how global economic reality develops.
It is all very well to point fingers at politicians, EU bureaucrats, bankers, and rich Greeks who take their money abroad. But when all is said and done a nation cannot spend more than it produces. This is not brutal, heartless, laissez-faire capitalism; it is economic reality. It would be unfair to expect German, or Portuguese for that matter, taxpayers to support a country that does not support itself and does not honour its debts.
 
Leaving aside the mismanagement of the Greek economy, one the features implicit in a currency union (CU) of many countries is, because of structural and economic reasons, some countries will be "winners" and some "losers". For example, if Germany had its own currency floating in the market it would be much higher valued than the Euro which represents an "averaged basket" of the value of the currencies of the countries making up the Eurozone. Germany and Northern European states have all been winners, the southern European states with their less well developed and more agriculture driven economies have been losers.

The adjustment mechanism for a CU is that the winners make transfer payments to the losers to support and develop them to normalise income and development in the long term. In the case of Greece this has not happened and all of the political, financial and economic benefits that Germany and others have received from CU membership are seen as their divine right and the losers continue to lose. A CU without an effective internal adjustment mechanism will always end in tears.

The IMF and ECB solutions to Greek problem are designed solely to keep the European banks whole. This is short-sighted and merely postpones the inevitable. When an entity is bankrupt debt restructuring and/or default is essential. Growth and ability to pay ones debts comes through growth, not austerity, which is exactly what Syriza has been arguing for.

Per the international banking crisis, banks and lending institutions have made bad decisions, made bad loans, but don't want to bear the consequences. The IMF, ECB, World Bank etc driving the negotiations are driven solely by what's best for the finance and banking elite, not for countries or people.
 
The currency union that is the EZ will have to morph sooner or later into a transfer union. But in order for that to happen there has to be some confidence on both sides (those with a surplus and those with a deficit) that everybody is working to more or less the same rules and abiding by those rules. This is the part that successive Greek governments have blown: there is little trust left that they will do what they say they will do.

As far as the losers bit is concerned, don't forget that Greek banks are being propped up at the moment by 85 billion euros of ELA cash. Not pocket change for an economy with a GDP of roughly 200 billion. The ECB does not want to be the institution that puts Greece into default.
 
The Euro has to be the most idiotic thing ever, given the differing economic situation of the countries involved. In the long term surely it will be better if the experiment just collapsed?
 
Brian said:
The Euro has to be the most idiotic thing ever, given the differing economic situation of the countries involved. In the long term surely it will be better if the experiment just collapsed?
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Exactly, a currency and financial methody the same for Mercedes, BASF, Leica and a Portuguese wine producer or tomato grower, forget it
 
PsB said:
Don't see why. The British pound covers a variety of profession like currency traders in the City and sheep farmers in the Orkneys without too much trouble.
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One could argue that the economy run for the benefit of one sector of the economy, City traders and financial institutions, detrimentally affects the rest of the country i.e. imbalances in income, unemployment, house price inflation etc...

The point is that the UK has a somewhat effective adjustment mechanism, regional aid, grants etc...not so much in the Eurozone.
 
The point is that every large economy has these feedback mechanisms built in. They require a shared framework: laws, rules, expectations etc. - some of these are still missing in the EZ. Greece leaving the EZ could paradoxically help them to develop.
 
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