GREXIT: Second Best

Travel costs are piling up. Last week, the IMF negotiators left Athens and took a transatlantic flight back to Washington. This weekend, the talks between the Commission and the Greek representatives ended nowhere, and the teams disappeared into their postponed weekend. What will happen on Thursday when the regular Eurogroup meeting will be held? Will the Greek guys fly in and out the same day? The situation remains rather unclear as spin is all around, and it gets incdeeasingly difficult to distinguish fact from fiction. Why, for example, should, as reported, the IMF insist on cuts of pensions in the range of Euro 400 mil if the Greek, with suppport of the Commission, is willing to reduce its – very high – defense budget in the same amount? What makes it so diffcult for the ECB and the EU to move towards a debt restructuring plan that would roughly follow the outlines of the Greek propsal when the unavoidable will anyway happen?

In any case, it is pretty clear that the currently known demands of the Institutions are nothing else then the continuation of the current mess. According to a calculation of Martin Sandbu in his Free Lunch column in the Financial Times the plan of the Institutions would imply a reduction of 1.6% of Greece’s GDP within a period of six months. By using the same size of multiplier (1.5) and identical feed-back mechanisms, Wolfgang Münchau calculates a reduction oif GDP within for years of 12.6% and a rise of the public debt ratio close to 200%. Those are unacceptable terms for Greece, in dependent from which government would run the show. In other words, the Institutions demand political suicide, nothing less. It seems fair to assume that the Greek government has in suicidal tendencies, and thus there is no rush at all to sign off.

Is walking away from suicide demanded by the Institutions different from committing suicide by way of introducing a new currency? I already discussed the economic and political fallout of a Greek default. In a short-term perspective, nothing good will come from such a move. In order to not totally lose access to private financial markets the Greek government will be eager to serve the small amount of private credits. This will probbaly not require any austerity as the amounts are really relatively small. However, rebuilding confidence is key as Greece will for a longer time being kept outside official lending channels. The sooner thye ECB shuts down access to TARGET 2 and to ELA, the quicker the Greek banking system will crumble. This requires immediate action from the Greek central bank whose expertise will become extremely critical for the fate of Greece. As the inflation rate will increase due to the deprecation effects on imported goods and services, the lead interest rate will have to go up as this – besides capital controls – will become a defense tool of utter importance. This comes with the price of punishing real investments, and thus with negative effects on economic growth.

And still, even such a dark scenario may look brigher then accepting the current demands of the Institutions. What a mess.