The Catharsis of a Greek Exit

JUL 6, 2015 4:04 AM EDT

By Mark Gilbert

Greek Finance Minister Yanis Varoufakis's  resignation -- even after Greek voters firmly backed the government's refusal to accept its creditors' demands for economic austerity -- is the clearest sign yet that Prime Minister Alexis Tsipras is serious about getting a new bailout deal. Unfortunately, it's probably too late to keep Greece in the euro.

The euro zone now faces a horrible choice. Tsipras will resume negotiations claiming to have a fresh democratic mandate, making it unlikely he'll accede to the tax and pensions changes he's previously rejected. So a new bargain would look awfully like Greece getting its own way -- a reward for bad faith and bad behavior. Kicking Greece out of the euro, on the other hand, would prove once and for all that euro membership can be revoked. Nevertheless, the latter option remains the better of two bad choices.

When the nation's banks fail to reopen and a fresh agreement on aid isn't completed within "one hour" -- two predictions confidently made last week by Varoufakis to help persuade his fellow Greeks to vote "no" -- the 61 percent of Greeks who took his advice may start to regret their decision. The euro's guardians, meanwhile, who had insisted that Greeks were voting on their future euro membership (no matter how incomprehensible the actual ballot question was) will struggle to accommodate the result without looking as if they're giving into a form of blackmail.

Rather than come up with some convoluted formula to give Greece enough money to stave off bankruptcy, European leaders should cut their losses and start the process of easing Greece out of the common currency project. The nation's stubborn contradictory stance -- yes to the euro, no to the conditions of continued membership -- isn't consistent with the euro's future well-being. The German newspaper Handelsblatt summed the situation up neatly last week, with a front page showing Tsipras holding a gun to his own head with the caption "give me money or I shoot myself."

Greece, for its part, should seize the opportunity to get out of the euro on the best terms possible. Those would include a restructuring of its debts, with creditors taking a one-time hit and reducing the debt burden from about 180 percent of gross domestic product. A new and devalued currency could help put the economy back on the path to recovery; economists including Roger Bootle at Capital Economics in London have argued this is Greece's best alternative.

Varoufakis announced his decision to quit on Twitter, directing followers to a statement on his personal web site:

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my … ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.

Call me old-fashioned, but it strikes me that Greece's negotiations have relied far too much on messages of 140 characters or fewer delivered via social media, adding to the government's reputation as amateurs.

While there's little evidence of contagion in financial markets -- the euro is barely changed from where trading closed on Friday, and bang in line with its three-month average value against the dollar -- Greece still poses a potential threat. The 89 billion euros Greek banks owe the European Central Bank for its emergency liquidity assistance, combined with the 100 billion euros owed by the Greek central bank to its Eurozone peers, is almost double the ECB's equity and reserves of 98.5 billion euros, according to calculations by the Cobden Centre, a research organization. Whatever the true value of the Greek collateral that the ECB owns against those liabilities, it certainly isn't 100 percent of its face amount. That poses a financial stability risk to the entire region.

Moreover, the ECB will struggle to maintain the myth that Greek banks are solvent when their ATMs are close to empty, their doors remain locked, and the government's aid package remains in limbo.

The euro's rules about what the central bank can and can't do for a member in trouble have been broken long enough. This has to end. The euro region needs the catharsis of a Greek exit, not the uncertainty of yet more wrangling. Greeks have had their say loud and clear: They're not willing to endure the strictures of membership. So they should leave the common currency.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:

Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:

Mary Duenwald at mduenwald@bloomberg.net