Complete Surrender – too late?

On the weekend the rumour was that the Greek government will run out of money on April 8. In order to make proper payment of salaries end of March the government will have to draw on cash of social security funds as well as of state-run companies. It is rather unlikely that Greece will have funds to repay another Euro 476 millions to the IMF join April 9; not to talk about the probability to refinance short-term government bonds that are coming up mid-April. The idea to issue Treasury-bills which Greek banks should buy is a los one since the ECB made crystal clear that Greek banks are already over-exposed to those risky bonds and will get no further extension of the refinancing limit with the ECB. It would be a huge surprise if the ECB would perform a turnaround after a meeting between Tsirpas and Draghi in a few days from today. The Eurogroup as well as the Council under the leadership of Chancellor Merkel repeat time and time that they will only free the last tranche of the Euro 7.2 billion credit if the Greek government provides them a concrete reform plan with very tight timelines. Complete surrender of a cornered government is the most likely outcome.  And yet, the question is whether this Greek government, and as experience demonstrated, any Greek government will be able to fundamentally reform the Greek economic-political system? Chances are slim that this can happen under the extremely tight schedule of the Eurogroup. Deposit outflow is accelerating again with daily outflows of more then Euro 300 million. This adds to the stress of Greek banks, and to the stress of the government. Surrender may satisfy the Eurogroup but actually not solve the underlying problems.

Merkel’s credo that Europe fails if the Euro fails can be read in various ways. One line of thought that is getting stronger argues that saving the Euro requires getting rid of Greece. An earlier analysis provided by Standard & Poor’s calculates the losses of a Grexit for the Eurozone members of overall 3% of the zone’s GDP. Germany’s loss would be exactly 3%; Italy and Spain would have to deal with a loss of 3.5 respectively 3.6% of their GDP. The relative largest loss would occur for Slovenia with 4% of its GDP. Those calculator losses include all various credits as well as the losses stemming from TARGET 2. As a matter of fact, the losses would stretch over quite some time as close to half of the direct credit losses only occur between 2020 and 2041. TARGET 2 losses only would be visible in lower central banks profits, and thus in a reduction of profit transfers to governments. Actually, the political costs may be higher then the immediate economic costs as a Grexit may feed second round-speculations about the stability of the smaller eurozone. There is no doubt that the Eurogroup plays a high-risk game, despite the manifold reassurances that its reformed institutional structure can deal with a Grexit.

And Greece? The country may become insolvent April 8. If it can’t serve its debt service any longer nor be in apposition to pay for its state apparatus it will have to declare insolvency. Given that Greece is already de-coupled from private credit markets this will only reinforce a already difficult position. Insolvency does not exclude Greece from the Eurozone, at least not automatically, nor does this imply the end of Greece’s membership in the EU. Next and first step we may see soon is the introduction of fierce capital controls, followed by the introduction of a domestic parallel currency that would act as means of payment. All this under conditions of Greece’s membership in EU institutions. It will need a lot of spin to explain this situation to private markets and voters across the EU.