Greece's Euro Exit Seems Inevitable

DRACHMA TRUMPS EURO?

MAR 17, 2015 3:00 AM EDT

By Mark Gilbert

Greece's money troubles resemble a game of pass the parcel, where each successive participant rips another sheet of wrapping paper off the box -- which turns out to be empty when the final recipient reaches the core. With time and money running out, a successful endgame seems even less likely than it did a week or a month ago. It's increasingly obvious that the government's election promises are incompatible with the economic demands of its euro partners. Something's got to give.

The current money-go-round is unsustainable. Euro-region taxpayers fund their governments, which in turn bankroll the European Central Bank. Cash from the ECB's Emergency Liquidity Scheme flows to the Greek banks; they buy treasury bills from their government, which uses the proceeds to … repay its International Monetary Fund debts! No wonder a recent poll by German broadcaster ZDF shows 52 percent of Germans say they want Greece out of the euro, up from 41 percent last month.

There's blame on both sides for the current impasse. Euro-area leaders should be giving Greece breathing space to get its economic act together. But the Greek leadership has been cavalier in its treatment of its creditors. It's been amateurish in expecting that a vague promise to collect more taxes would win over Germany and its allies. And it's been unrealistic in expecting the ECB to plug a funding gap in the absence of a political agreement for getting back to solvency.

There's a YouTube video making the rounds on Twitter this week of a lecture Yanis Varoufakis gave in Croatia in May 2013. The most arresting section comes after about two minutes, when the current Greek finance minister literally flips the bird at Germany while saying:

My proposal was that Greece should simply announce that it is defaulting, just like Argentina did, within the euro in January 2010, and stick the finger to Germany and say `well, you can now solve this problem by yourself'.

Maybe Varoufakis is all grown up now that he has a big government job and isn't just a maverick professor; moreover, he says the video has been doctored, although the German television channel that aired the footage on Sunday found no evidence of manipulation, according to the Associated Press. But the image of him raising his middle finger is emblematic of how the Greek government currently regards its biggest creditor.

And if what Varoufakis went on to say is instructive of the game-theory professor's mind-set, the lack of progress in negotiations with lenders isn't so surprising:

The most effective radical policy would be for a Greek government to rise up or a Greek prime minister or minister of finance, to rise up in EcoFin in the euro group, wherever, and say "folks, we're defaulting. We shall not be repaying next May the 6 billion that supposedly we owe the European Central Bank. My God you know, to have a destroyed economy that is borrowing from the ESM to pay to the European Central Bank is not just idiotic, but it’s the epitome of misanthropy. Say no to that. Put them in front of their contradictions. Make them face the contradictions of the euro zone themselves. Because the moment that the Greek prime minister declares default within the euro zone, all hell will break loose and either they will have to introduce shock absorbers, or the euro will die anyway, and then we can go to the drachma.

Greece's three-year bond yield is back above 20 percent, double what it was just before Alexis Tsipras was elected prime minister on an anti-austerity platform in January. At that level, there's no way Greece can end its reliance on its bailout partners anytime soon.

German Finance Minister Wolfgang Schaeuble was scathing yesterday about Greece's efforts to balance its election promises with its bailout obligations, and about its standing with international investors:

"None of my colleagues, or anyone in the international institutions, can tell me how this is supposed to work. Greece was able to sell those treasury bills only in Greece, with no foreign investor ready to invest. That means that all of the confidence was destroyed again."

Every day's delay in cutting a deal pushes Greece a little closer to leaving the common currency. That would be a shame, since it's an outcome no one -- apart from Schaeuble -- seems to desire. The mutability of euro membership could also unleash contagion and a domino effect. But it looks increasingly inevitable.

To contact the author on this story:

Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:

Paula Dwyer at pdwyer11@bloomberg.net