Greece Continues That Slide Towards Grexident

Forbes

By Tim Worstall

It’s somewhat difficult to work out what is the negotiating strategy of the Greek side over this debt bailout deal. For it’s increasingly looking like that wonderful portmanteau invention of Schaeuble, the German finance minister, could be about to come true, Grexident. That is, Greece leaving the euro and the eurozone by accident, not by design. Everyone involved in the negotiations keeps insisting that this isn’t what they want to happen. But everything being done by the Greeks appears to be making this more likely. At which point one really does have to start wondering, well, is this actually being done by mistake or not? For it’s long been known that various of the Syriza people, the finance minister Varoufakis among them, privately think that they simply will not be able to reform the Greek economy as they wish to while inside the euro system. It’s just that the Greek electorate doesn’t think that way.

We’ve the usual German insistence that whatever the deal is it must accord with everything that has been agreed so far:

Greece pledges reforms, rejects austerity

Greek Prime Minister Alexis Tsipras has pledged to submit a reform list within days to unlock further financial aid from the Eurogroup. But German Chancellor Angela Merkel says Athens will only receive fresh funds if it respects “every paragraph” of its bailout deal.

But the point is that from the Greek side that’s just not how they are acting:

If there is one thing all sides in the Greek crisis publicly agree on, it is that Greece should stay in the eurozone. Yet with every day that passes without the Greek authorities and their creditors even finding a common basis for discussion, that exit creeps ever nearer.

The FT is institutionally pro EU and pro euro so when they start worrying like this it’s an idea that needs to be taken seriously.

The paths forward both in the short and the long term are clear. They involve keeping the Greek financial system functioning — and depositors and investors confident of a solution — while a deal is worked out. But with every reversal of direction and empty act of defiance, more deposits trickle out of the Greek banking system, and the exit everyone involved professes to abjure comes a little closer.

That’s really it. The troika has the Greek government hemmed in. It can’t borrow on the international markets: absolutely no one is willing to lend to it. The troika and the eurosystem isn’t going to offer it any more finance until the Greeks sit down and start acting like good little debtors, not just talk about doing so in the future. And the Greek government can’t borrow domestically either, because there’s a limit imposed on how much they can borrow there through Treasury Bills. Tax collection has fallen off a cliff and thus the Greek government is scrambling to find the money to pay wages and pensions while also keeping up with its debt repayments.

OK, so we all know this is happening: and the important point becomes when those with deposits in Greek banks think that Greek exit will happen. At that point the capital flight already going on becomes a flood and then the Greek government simply has to recapitalise those banks or it will find itself without a financial system: and thus without an economy. But there is no source of recapitalisation possible without the introduction of the new drachma. Thus continued membership of the euro depends upon what those depositors think is going to happen. Not what actually does happen: but what people think will happen. And the more that Greek government plays around and annoys the troika the more people think that Grexit will happen and thus act to as to bring Grexit about. And that’s the Grexident that Schaeuble is talking about.

It really all could happen by accident, just by spooking the markets, and that’s what people are getting worried about: Syriza is so spooking the markets.

My latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.