Mish's Global Economic Trend Analysis |
Posted: 03 Jan 2015 02:35 PM PST There's an amusing pair of headlines back-to-back today on what a Greek exit from the Eurozone might mean. One view is catastrophic, the others is along the lines of no problem. Let's start with the catastrophe. Economic historian Barry Eichengreen says Greek Euro Exit Would be 'Lehman Brothers Squared. A decision by a new Greek government to leave the eurozone would set off devastating turmoil in financial markets even worse than the collapse of Lehman Brothers in 2008, a leading international economist warned Saturday.Limited Contagion Thesis Yahoo!Finance reports Germany Believes Eurozone Could Cope with Greece Exit. The German government believes that the euro zone would now be able to cope with a Greece exit if that proved to be necessary, Der Spiegel news magazine reported on Saturday, citing unnamed government sources.Competing Views on Funding Needs Before taking a side in the above debate, let's take a look at competing views on Greek funding needs. Please consider a snip from SYRIZA Makes Fresh Pledge to Defend Greek Capitalism. Analysts at Bank of America Merill Lynch, "think Tsipras will face a budget black hole of at least 28 billion euros in the first two years of his government, with nowhere to borrow from and 17 billion euros of repayments to make in the first year."In contrast, the Wall Street Journal reports Greece Expects Primary Budget Surplus for 2015. Greece's 2015 budget, submitted by the government to parliament on Friday, aims to meet the fiscal demands of the country's creditors but comes without the prior approval of its troika of international inspectors.Primary Account Surplus or Not? Does Greece have a €28 billion black hole or a surplus? Both can technically be true. The €28 black hole counts interest on debt including the €245 bailout package. The primary surplus theory ignores interest on the debt. If the Troika suspends the bailout, then Greece will have no choice but to default. Of course, that points to the absurdity of the alleged bailout setup in the first place. Even if the interest rate on the bailout was 0%, at €3 surplus every year, it would take Greece 81 years to pay back that debt! Economic Reality There is no realistic way Greece can ever pay back €245 billion, so it won't. With that thought, let's return to the first question. Would a Greece exit be "Lehman Squared" or would it have little effect? Actually, no matter what happens with Greece, the entire eurozone setup is unstable. Greece, Spain, Italy, and Portugal all are in impossible payback setups. Even if Syriza loses the next election, sooner or later Greece, Spain, Italy, or possibly even France will exit the eurozone. The "limited contagion" view is complete nonsense. The eurozone debt problem is going to explode, and whether or not it becomes "Lehman Squared" depends on the response. My view is the longer the ECB and EU attempt to hold this mess together with no debt writedowns, the bigger the catastrophe. Greece will not cause a catastrophe, but the EU/ECB handling of a Greece exit is highly likely to do just that. Eventually, Will Come a Time As I said in my November 23, 2011 post Eventually, Will Come a Time When .... Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.Possibilities
Where to Point the Finger When it Blows The pot is simmering and is likely to boil over at any time. When it does boil over, Greece will not really be to blame, even if Alexis Tsipras wins the election and carries out his threats. Rather, be prepared to point the finger at the EU, ECB, and IMF for their collective insistence that Greece, Spain, Italy, etc. repay debt that cannot and will not be paid back. By the way, there is a small chance Tsipras wins the election and Greece exits the eurozone with limited initial fallout. If so, the major problem will come when Spain or Italy does the same thing. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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