Thursday, May 17, 2012

Greek Exit: Grexit? Grezit?

I had money on the Merkel Fiddling One ...
There's a run on Greek banks:
Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support.
President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma.
He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6.
I think when your denial is that "great fear" could soon "escalate" to panic it's like saying of the guy in the coffin his state of being "deceased" might soon be regarded as being dead. Certainly the headlines ... are not promising:
Huge Sense of Doom Among ‘Grexit’ Predictions Huge protests in Madrid, firebombs hitting tax offices in Italy, and voters in Northern Germany showing their anger toward an incumbent leader. Just another weekend in euro land, where the chances of economic recovery and political agreement on how to get there appear less likely by the hour.
 The Greek end-game doesn't seem to have any win-win conditions:
[Tsipras] says he rejects the E.U.-imposed austerity program but wants to stay in the euro and in the European Union. But Greece has a large primary budget deficit and no source of market financing. The E.U. is insisting on an austerity program, but it's also giving them cold, hard cash in the interim. Reject the austerity program and you lose the E.U./IMF money and need to implement an even harsher austerity program. Tsipras is a bit like a guy standing in your living room threatening to blow his own brains out unless you pay him money, a proposition he offers on the theory that you'd rather not see your furniture ruined.
And consider:
The Only Way To Win Is Not To Play

What Does It Mean?
For Greece: the best case is that it somehow navigates the austerity back to, eventual, stability and growth. The worst case is some kind of collapse. Failing navigating the austerity the other option is Argentina: Default, print money, and navigate the chaos. It's not clear that "the chaos" will be as clean as Argentina's was (for one thing, Argentina was surrounded with trading partners that were not wealthy European nations--and Argentina had, I believe, natural resources and such that were objectively valuable. Greece has tourism draws ...). The chaos would be something like:

  1. Collapse of the financial network. Huge increase in black markets. Loss of government services--and attendant rise in crime and nationalism.
  2. Loss of the youth--everyone who could would abandon the sinking ship. There might not be many jobs in the rest of Europe--but if they could leave, they would.
  3. Riots--we have already seen civic unrest. Martial law? Food and water shortages?

For Europe: the big question is "can they contain the contagation?" An ING Report suggests that the "best case" for a Eurozone breakup would be worse than Lehman Brothers.In any event, Spain is hurting now ... Italy isn't far behind. It's not clear what tools the European Central Bank has left in the box once you take out the political backlash the Germans are likely to feel.

For the US: In January JPMorgan CEO Jamie Dimon said the impact of a Greek default on US banks would be almost nothing. He is credible because he is very smart and JP Morgan managed to navigate the 2008 meltdown relatively unscathed. That's good: we can trust him. So long as something absurd like JP Morgan losing 2bn on risk mitigation doesn't happen we should be a-Okay. Airtight.

What Do I Think?
I think that (a) Greece is going to default after their next election cycle and (b) Contagation will spread somewhat. I think Spain will have to get even meaner with its populace which will trouble France and Germany and their populaces in ways the Greek agony does not. I think the prospect of Italy going down will terrify everyone.

Given that, I think there is only one real solution to the mess ... A new Marshall Plan. The Marshall Plan was designed to rebuild Europe and prevent communism. In this case it would be to "rebuild Europe and prevent economic collapse." Now, I know what you're probably thinking. Maybe something along the lines of:

  1. They don't deserve it. Greece lied and cooked its books to get into the EU and then lived large for decades (never mind that the EU really knew this and uses them as a cheap place to sell German goods)--this is true. However the youth of today who will be hardest hit didn't do this. They do not deserve what is coming. In any event: whether they deserve it or not is besides the point.
  2. We can't afford it. We can't. We also can't afford not to (well, if Dimon is right, we can afford not to. Want to bet on JP Morgan? Let's check their stock ...). The fact is that we probably can "afford it." We can still borrow money at 2%. While almost no one paid back their WWII debts, we could engineer ways for this one to sink in (think: trade agreements, seat on the ECB, etc.). We'd also make sure German, for example, pitches in with matching funds or something.
The real reason to do this, however, comes down to strategic investment: If you think China is going to be the next dangerous enemy, what condition do you want Europe in for the 2030's? Think about that. It's also possible that a flurry of over-seas contracts for American based multi-nationals "rebuilding Europe" could actually, you know, stimulate the US economy.

But whether or not this is all wishful thinking ... do you see any other way out? Or do we just firewall ourselves and let it burn?

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