A week ago, we said the following about
the situation faced by Greek PM Alexis Tsipras when he and his new finance
minister arrived in Brussels for the final round of bailout negotiations
earlier this month:
...the entire world looked on in horror as Alexis
Tsipras - who just days earlier secured a crucial referendum victory which by
all accounts empowered him to ride into Brussels a conquering hero - was
eviscerated by German FinMin Wolfgang Schaeuble and several like-minded EU
finance ministers who smelled blood after Greece submitted a proposal that
betrayed the Greek PM’s lack of conviction.
In short, Tsipras made a fatal error. In an act of
alarming defiance, he boldly called for a referendum on creditors’ proposals,
campaigned for a "no" vote, and then, once 61% of the Greek populace
gave their leader a mandate to reject more austerity, he proceeded to resubmit
the very same proposal Greeks had just voted against. That told EU officials
that Tsipras had no intention of leveraging the referendum outcome and from
there, the "mental waterboarding" was on.
Now, Greece is stuck with a deal that promises more of
the same austerity measures that have so far served only to prolong an
intractable recession and indeed, without some manner of debt relief or
re-profiling, the new program has no chance of success.
Given all of this, it isn’t surprising that economists
are once again beginning to talk about Grexit, and indeed, who can blame them?
It’s difficult to take seriously the idea that the new "deal" has
taken a Greek exit off the table when German FinMin Wolfgang Schaeuble still
claims that a Greek exit from the EMU might be the country’s best chance at a
"classic" haircut and economic recovery. Here’s Bloomberg with more on
why Grexit is "back on the agenda":
Don’t pack away the currency presses just yet,
Greece’s euro exit may be back on the table next year.
There’s still a danger that Greece will be forced out
of the euro region by the end of 2016, according to 71 percent of respondents
in a Bloomberg survey of 34 economists. Seventy
percent said they reckon Greece should be safe for the rest of 2015, though
almost half said they thought the 86 billion-euro ($93 billion) bailout package
Prime Minister Alexis Tsipras is targeting will prove to be too small.
While Tsipras is checking off the requirements to
qualify for a third bailout, the flaws in the agreement he hammered out with
euro-area leaders last week are fueling concerns that Greece will struggle to
implement the three-year program.
The European creditors are refusing to firm up their
commitment to restructuring Greece’s debts, a move the International Monetary
Fund says is essential for the country to stabilize its finances. There are
also doubts about the 50 billion-euro target for asset sales and, more
fundamentally, the merits of forcing more austerity on a shattered economy.
'Without some form of debt relief, the package will
never be big enough," Peter Dixon, a global economist at Commerzbank AG in
London, said in his response to the survey. "Loading additional
loans onto a country which cannot afford to repay them corresponds to
Einstein’s definition of insanity: Trying the same thing over and over again in
the expectation of different results."
“Apart from Germany, it appears that most people are
in agreement that Greece needs a substantial debt writedown," said Alan
McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. "Unless
they get it, it is hard to see the country surviving within the euro zone
indefinitely."
Well, no. It’s not that Germany isn’t in agreement
about whether Greece could use a debt writedown.
In fact, Schaeuble explicitly acknowledged that
Athens needs debt relief less than a week ago. For the Germans it isn’t about
whether Greece needs a writedown, it’s about whether Greece will
get a writedown, and as long as the country remains in the currency
bloc and Germany still holds the purse strings, there will be no haircut for
the Greeks.
If, however, Greece were to take Schaeuble’s
"time-out" from the euro, Germany has hinted writedowns might be
possible and that, in and of itself, shows that indeed, the idea of a Grexit
has by no means been confined to the annals of European history.
Here with more on all of the above including Tsipras’
tactical error and the country’s inevitable break with Brussels is
Eurointelligence’s Wolfgang Münchau:
Originally published in FT:
Alexis Tsipras should never have hired Yanis
Varoufakis as his finance minister. Or he should have listened to him, and kept
him on. But instead the Greek prime minister chose the worst of all
options. He followed Mr Varoufakis’ advice of rejecting the offer of the
creditors — until last week. But having done this, Mr Tsipras committed a
critical error by rejecting Mr Varoufakis’ plan B for the moment when
the country’s banks closed down: the immediate introduction of a parallel
currency — IOUs issues by the Greek state but denominated in euros. A parallel
currency would have allowed the Greeks to pay for their daily transactions when
cash withdrawals were limited to €60 a day. A total economic collapse would
have been avoided.
But Mr Tsipras did not go for this, or indeed any
other plan B. Instead he capitulated. At that point, he was no longer even in a
position to choose a Grexit — a Greek exit from
the eurozone. The economic precondition for a smooth departure would have been
a primary surplus — before debt service — and an equivalent surplus in the
private sector. Greece has no foreign exchange reserves. If the Greeks were to
reintroduce the drachma, they would have had to pay for all of their imports
with the foreign exchange earnings of their exports. These minimum
preconditions were in place in March but not in July.
So, like his predecessors, Mr Tsipras ended up with
another very lousy bailout deal. And this one suffers from the same fundamental
flaws as its predecessors. This leads me to conclude that Grexit
remains the most likely ultimate outcome after all.
There are three principal ways in which this can
happen. The first is that a deal is simply not concluded. All that was agreed
last week is for negotiations to start, plus some interim financing. A deal
might fail because principal participants themselves are sceptical. Wolfgang
Schäuble, the German finance minister, says he will keep up his offer of a Grexit
in his drawer, just in case the negotiations fail. Mr Tsipras denounced the
agreement on several occasions last week. And the International Monetary Fund
is telling us that the numbers do not add up, and that it will not sign unless
the European creditors agree to debt relief.
A more likely Grexit scenario is that a programme is
agreed and then fails. The Athens government may implement all the measures the
creditors demand, but the economy fails to recover and debt targets remain
elusive. Mr Tsipras already agreed last week that if this situation arose, he
would pile on more austerity. So, unless the economy behaves in future in a
very different way from the way it behaved in the past, it will remain trapped
in a vicious circle for many years to come. At that point, Mr Tsipras, or his
successor, could concede defeat and opt for a negotiated Grexit as the least
painful option. Grexit could also be forced on them by the creditors.
My own most likely Grexit scenario is a different one
yet again. Donald Tusk, the president of the European Council, hinted at this
in his interview with the Financial Times last week when he said that he felt
"something revolutionary" in the air. He is on to something. The most
probable scenario for me is Grexit through insurrection.
In other words, after suffering untold humiliation at
the hands of creditors, Greeks will eventially be pushed to their breaking
point.
Scavenging through the trash for food, lining
up at banks to receive rationed euros,
scarcities of imported goods - eventually enough will be enough. Once Greek
society reaches the tipping point, a popular revolt - an
"insurrection" or "something revolutionary" - will
follow.
At that juncture, officials in Brussels will proceed
to the 13th floor of the Berlaymont building, open the safe a few meters down
from EU President Jean-Claude Juncker’s office, and dust off the Grexit "Black Book."
Next, the streets of Athens will "fill with the
sounds of tanks."
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