8 April 2015

The Great Greek Impasse


The Greek crisis has pushed its way back up the news schedules again as Greece’s latest IMF repayment deadlines draws near.  Thursday April 9th is the day, and with bank holidays on Friday and Monday for Greek Orthodox Easter, a few of the more excitable commentators have wondered whether this might be a good moment for the Greeks to default or even exit the euro.

Though the timing is auspicious, euro departure is not very likely quite yet.  For a start, missing an IMF payment would not immediately be a default.  The IMF would give Greece a grace period of several weeks — well into May — before it would officially deem it to be in default.  And even official IMF default might not, quite, trigger Grexit instantly.

We’ve reached an “After you.  – No, after you.” impasse.  It seems to me that both the key Eurozone creditor states such as Germany and the Greek Syriza-led government believe that it is best if Greece leaves the Eurozone.  But the Germans et al do not want to tell Greece to leave.  If they do that, then investors will ask: “Which country will they tell to leave next?  Will it be Portugal or Italy?”  They want Greece to choose to leave.  Since neither Portugal nor Italy is at all likely to ask to leave, Grexit would then be seen as very much a particular case with few implications for the integrity of the rest of the Eurozone.

But the Greek government does not want to choose to leave.  Some 70% or more of Greeks say they want to stay in the euro.  Choosing to leave the euro could be domestic political suicide.  What they want is to be told to leave.

So the Greek government seeks to antagonise its Eurozone partners, by being uncooperative in the bailout negotiations, by cosying up to Russia, and through being publicly insulting to most of the rest of Europe.  (“After you.”)  The Eurozone responds by granting Greece very little ECB liquidity, humiliating it in political negotiations, and referring to the overseeing institutions as the “troika” even though they know that term is anathema in Greece.  (“No, after you.”)

This lack of appetite on either side to draw first is (slightly) more likely than not to get us through to June, now.  (I estimate about a 30% chance of Grexit by June.)  Once we get to June, however, that game will have run its course.  At that point Greece will need a new (third) bailout of many tens of billions of euros if it is to meet its large repayments of July and August and beyond.  Even if the German Parliament, along with the Finns, Dutch and others, would agree to yet another bailout, they would absolutely 100% require a new bailout programme (a new “Memorandum of Understanding” or its equivalent) that set out how Greece would go about making itself able to repay.  As things stand, there is no realistic chance of the Greeks agreeing to a new Memorandum of Understanding in any form its Eurozone partners would consider credible.

Now, obviously there is some possibility that the game of refusing to draw first is somehow extended into another bailout programme.  There is also some chance that the Greek government collapses or that it capitulates and Greece does in fact knuckle under sufficiently that a third bailout become a possibility.  That might not keep Greece in the euro long-term, but it might last to the end of 2015.  I’d put about a 30% chance on that, meaning I think there’s about a 70% chance that Greece does not get a third bailout and exits some time later this year, perhaps after a series of messy defaults and political brinksmanship through the summer.

This drama is still probably only in the second Act.  The third Act climax awaits us yet.

Andrew Lilico is Chairman of Europe Economics.