Flirting With Grexit Risk

This is no way to run a railroad. But the powers that be that run the European currency experiment have a taste for brinkmanship and 11th hour deals to avert a crisis. No one’s better at this task for the simple reason that Europe has more crises than a dog has fleas. It’s anyone’s guess if the current standoff with Greece — yesterday’s negotiations over bailout terms ended in a standoff — will end in tears or a solution. But the news to date makes one thing clear: the Eurozone leadership has been and continues to run a reckless policy. That’s partly due to the wobbly structure that is the currency union, which seems to be designed only for sunny macro weather with no mechanisms for dealing with turbulence. But there’s also plenty of blame to go around with the day-to-day management of the negotiations.

Perhaps there’s a method in all the madness. Could it be that the game is one of engineering a stalemate that keeps the players on edge, followed by a sudden solution right before the bomb explodes? The euro version of James Bond movie. As of yet, however, it’s unclear who will play the role of our dashing hero. But the broad outline of a plot is starting to take shape, or so some pundits argue.

“Europe’s going to back down. They’re going to give more concessions to Greece,” says Destination Wealth CEO Michael Yoshikami. “In the end, there’s going to be a new agreement, not just an extension, but a renegotiation.”

The immediate roadblock is Greece’s rejection of a six-month extension of an internationally financed bailout package. As Yanis Varoufakis, the country’s finance minister, writes in The New York Times:

We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis.

Hardly the basis for moving forward… or is it? We may know the answer by the end of the week. Jeroen Dijsselbloem, the Dutch finance minister who led yesterday’s failed talks, told Athens that the ability to request an extension of the current bailout ends on Friday. “The general feeling in the Eurogroup is still that the best way forward would be for the Greek authorities to seek an extension of the program,” he explained at a news conference yesterday. “That would allow us to work on future arrangements … and allow for the Greeks to use the normal kind of flexibility in a program, change measures, put other measures into place.”

Friday may be the drop-dead date, but maybe not. A Eurasia Group analyst reportedly wrote on Monday that a deal might arrive just ahead of Feb. 28, the actual expiration date of the bailout program. Could a few days make a difference? Well, when you’re playing with fire, a few minutes can sometimes be an eternity.

Meantime, the fact that yesterday’s talks collapsed suggests the situation is dire. But this can hardly have come as a shock to the crowd. The odds for a deal looked quite low from the start. Going into the meeting German Finance Minister Wolfgang Schaeuble said: “What I have heard so far has not strengthened my optimism. As long as the Greek government doesn’t want a program I don’t have to think about options.”

The operative question is whether the Germans and the rest of the currency union’s power structure are thinking now? Minds will differ on an answer.

Just to keep things interesting, there’s talk that China or even Russia (?!?!) may pony up some money for Greece, in effect financing the first move in what would likely be seen as the opening bid of a new phase of economic warfare (as well as the first step in the eventual decline and fall of the euro).

But leaving far-fetched notions aside, perhaps the real problem for Europe is that a home-grown solution may be worse than the problem. Let’s assume for a minute that in a fleeting moment of benevolence the Eurozone leadership decides to write off a substantial portion of Greece’s debt. All’s well that ends well? Not quite, since other countries in the Eurozone that are struggling to pay off their liabilities at a time of sluggish growth will take inspiration from Athens’ financial coup d’etat. At that point, the game starts anew, only this time it’s three-dimensional chess.

Here’s the challenge: giving Greece some face-saving concessions without inspiring Spain, Portugal, etc. to seek something comparable. Ultimately, both sides will need to adjust their thinking, realign their expectations, and embrace innovation in the extreme at the next round of negotiations (assuming there are any)—and do so by Friday, or Feb.28 if you’re an optimist.

Yes, this looks like a train wreck, and one that’s entirely of Europe’s own design. It’s patently obvious at this late date that the currency union as structured couldn’t withstand anything more than a mild bout of macro turbulence. Signing off on the deal all those years ago was the equivalent of building a straw hut on Florida’s coast and (with a straight face) telling the would-be buyers (Europe’s voters) that hurricane risk was no longer a threat.

Yes, there’s a way out of this mess. We just can’t see it yet. There are, of course, countless proposals (most of them impractical) circulating. Here’s one more: Mario Draghi and the European Central Bank roll out yet another monetary program that’s designed to specifically address the current crisis. Unrealistic? Unworkable? Unfeasible? Yes, of course. But then again, so is the euro, but somehow it manages to stumble on.

One thought on “Flirting With Grexit Risk

  1. Pingback: Greece and the Eurozone Continue Their Standoff

Comments are closed.