Buffett not alone in failing to grasp Grexit dangers

If Mr Buffett seriously thinks that the euro would be strengthened by a Greek exit, which is what he said, then he needs his head examined.

The Telegraph

By Jeremy Warner7:30PM BST 04 Apr 2015

It is hard to think of a nicer and wiser capitalist than Warren Buffett, but every man has his day, and the time may finally have come for the Sage of Omaha to spend more time with his ukulele.

I say this because last week he demonstrably broke one of his first rules of investment, which is never get involved in things you don’t fully understand.

If Mr Buffett seriously thinks that the euro would be strengthened by a Greek exit, which is what he said, then he needs his head examined.

Leaving the euro may or may not be good for Greece in the long run.

Yet it will also surely leave European monetary union even more weakened, unstable and lacking in credibility than it already is, if that was indeed possible.

The moment it becomes possible for a country to leave the euro, the currency transmogrifies from a single monetary region into little more than a system of pegged national exchange rates, which countries can opt in and out of according to need. It is hard to see the point of such a construct, except as a recipe for chaos.

Mr Buffett is also deluding himself if he thinks there are now sufficient firewalls to prevent contagion.

It’s true that very little Greek public debt is now owned by private creditors, making a repeat of the chain reaction of threatened banking defaults that happened in the aftermath of the Lehman’s collapse quite unlikely.

Unfortunately, this has not really defused the problem, but merely transformed into something else. The vast bulk of Greek public debt is now owned either by other Eurozone states on a bilateral basis, or by other official sources — the IMF, the ECB and European Union bail-out funds.

Refusal to pay the €498m due to the IMF next week would mark the point of no return. Italy alone has €40bn out on loan to Greece. Portugal and Ireland, which have also been “programme” countries alongside Greece, have similarly been forced to shoulder their share of the Greek bailouts.

These already cash-strapped nations can ill afford such a loss. An exit/default is therefore likely to be a deeply traumatic event for all involved.

The geopolitical repercussions of an enforced exit threaten to be equally destabilising, with Greece likely to turn to Russia, China and even Iran for succour in the event of European ostracisation.

By the look of it, Greece’s Syriza-led government is fully prepared to take the nuclear option, and unilaterally default in the absence of meaningful concessions.

The European Union seems similarly unprepared to tolerate an alien, revolutionary, Latin American-style government in its midst, almost regardless of any concessions it might offer.

The only senior Eurozone policymaker fully to understand the dangers seems curiously to be Britain’s favourite eurozone bête noire, Jean-Claude Juncker, the EU president.

He’s determined to keep Greece in at almost any cost.

A Greek exit, he says, would lead to an “irreparable loss of prestige for the whole of the EU”.

That, I fear, will be the least of his worries. Forget the UK election; the main event is happening outside our borders, and it looks ever less likely to have a happy ending.