Greece has once again returned to the spotlight as the driver of European woes.However the recent freak-out that political catastrophe will actually result in a Greek exit from the euro is premature…for now.
Investors who seem convinced that this is the make-or-break-it moment for Greece are forgetting a number of simple lessons that we’ve learned from the European crisis so far.
The story goes that a win for the anti-bailout parties in the next elections on June 17th would make it impossible to pass the next round of austerity criteria demanded as part of the terms of the second Greek bailout—in particular, spending cuts for 2013 and 2014. From there, the troika of international lenders providing Greece with foreign aid would withhold payments, causing a hard default on Greek debt.
While it remains plausible that Greece could exit the euro currency one day, it is difficult to believe that next month will be the moment of truth.
First, the majority of Greeks still support the country’s membership in the euro currency, so an exit right now would amount to a forcible ejection of the country from the EMU. This would be too much of a risk for the rest of the euro area. It would be one thing for a country to leave the monetary union voluntarily and another for it to be kicked out forcibly.
Eurozone countries on bailout programs have regularly failed to meet all the criteria set forth by their German-led lenders, and increasing the stakes in Greece would fan investor fears that another country could be kicked out at the slightest infraction or disagreement. This would likely spark widespread runs on banks across the euro area; Jefferies chief economist David Zervos summarized this in a recent note:
Why wouldn’t every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?
Secondly, simply withholding funds from Greece would compromise all the funding Europeans have devoted to the Greek rescue effort so far. Instead of dramatically diminishing the outstanding debts Greece must pay off, the second bailout essentially replaced much of the private sector lending with public sector lending, at more lenient terms.
But beyond losses alone, in order to adequately quell market concerns Europeans would have to devote massive new funding to properly avert contagion and make monumental structural decisions Germans in particular have to date ruled out. Analysts have suggested that the European Central Bank would have to take on a role as the lender of last resort for European banks and sovereigns and that the establishment of eurobonds could be a way to reassure investors that Germany will stand behind the debts of its less creditworthy and more illiquid neighbours.
Ultimately, however, Germany is more likely to grudgingly hand over a check right now than to agree to measures that will materially alter its fiscal and power position in the EMU. Deeper fiscal integration is likely the ultimate answer to Europe’s problems, but despite some signs that Germans are becoming more tolerant of this path they are far from supporting inflationary monetary policy and fiscal transfers that would be necessary to reassure markets that the euro union beyond Greece is unbreakable.
Moments of panic about Greece are nothing new. Just a few months ago, investors were concerned that EU leaders would prevent a credit event from occurring when Greece defaulted on its debt, undermining derivatives markets across the European Union. Before that, they worried that a referendum on Greek austerity measures would render its next bailout impossible. And just last summer, analysts were flipping out about the costs of a Greek default. In reality, the worst-case scenario in all of these situations did not occur. EU leaders played dangerous games of chicken with banks, the Greek people, and each other, yet in the end the outcome of all these disputes was never unexpected, allowing investors to ease themselves into difficult realities.
The game of chicken being played between the Europeans and the popular, anti-bailout SYRIZA led by Alexis Tsipras is monumental only in that it demonstrates how the crisis is slowly eating away at support for German-led austerity. Neither side is as solid as it could be; German Chancellor Angela Merkel faces new opposition from the pragmatist new French President Francois Hollande, and will be hard-pressed to slow a new push for common eurobonds.
At the same time, Tsipras’s inability to entice other leftist parties to join an anti-bailout coalition after the first round of elections is a sign that support for SYRIZA might not be as strong as some would believe. According to Eurasia Group political strategist Wolfango Piccolo:
Even if SYRIZA were to emerge as the largest party in the aftermath of a possible second election, its ability to form an outright anti-bailout government would be very limited as it will struggle to find suitable partners. Even more remote is the possibility of SYRIZA garnering enough votes to control an overall majority in parliament (151 seats).
The scariest effects of the eurozone crisis have always been in the collateral damage: just take the bank crisis that began to slowly eat away at liquidity throughout the region last fall. In reality, the political brinkmanship occurring right now has the positive effect of preparing investors for a Greek exit when it does happen. But right now Europe has too much to let Greece leave, particularly in a disorderly fashion.
On the other hand…GET READY: This Is What Happens If Greece Exits The Euro >
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