The number of prominent market commentators calling for an immediate Greek default as the only sensible outcome of the current crisis continues to rise. The latest luminary to add his voice to the chorus is Mohamed El-Erian, chief executive of Pimco, speaking at a video conference in Taipei.
What will have stung the small army of politicians and central bankers desperately trying to keep Greece on its feet and in the game is the obvious fact that El-Erian’s comments come at a hugely sensitive moment in the Greek saga. The Greek cabinet has just approved an austerity budget plan, to run from 2012 to 2015, that is astringent enough to satisfy the palette of even Germany’s redoubtable finance minister, Wolfgang Schäuble (and which will go down with the Athens rioters like a petrol tanker driving into the flames). And the Greek Prime Minister has just survived a vote of confidence in the Greek Parliament that most people regarded as far from an even bet.
In other words, those on the side of ploughing on and toughing it out, rather than allowing the euro dominoes to begin to fall, had just been given some hope, when Pimco’s much respected CEO weighed in. His logic? In a nutshell: you’re just throwing good money after bad. Time to stop. Nothing you are doing is improving the state of affairs you are addressing.
Saved by the bail-out
By 23 June it looked more or less certain that Greece would get the €12bn of EU bail-out money it needs to stop it running out of cash. That cash injection, though agreed and planned, became far from certain when the IMF suddenly remembered that its charter forbids it lending when the credit rating of the country concerned makes default a virtual certainty (i.e. the IMF is not actually allowed, in El-Erian’s words, to throw good money after bad). Greece’s failure to drive through sufficient privatisation measures or to pass sufficiently stringent austerity measures cast real doubt on the deal.
Then German politicians, led by the formidable Schäuble, demanded that the private sector, namely the banks who had bought Greek debt, should be a part of the bail-out and should share the pain if German taxpayers were going to be called on to underwrite further Greek debt. Since everyone knew that that was never going to happen, the whole bail-out manoeuvre seemed to be coming apart. And just when they get it all patched up, El-Erian and others tell them that they’re wasting their time and their citizens’ money.
So what is really at stake here? Those who are in favour of continuing to try do so because they believe that the consequences of a Greek exit could reach as far as the break up of the EU, with, presumably, catastrophic economic consequences. Those in favour of a Greek default point to the fact that Greece is just a very small part of Europe and that the much-feared domino effect if Greece goes, with Ireland, Portugal and Spain set to follow, is far from inevitable. (They probably haven’t spoken to many Irish voters…).
The default camp tend to point to the cases of Russia and Argentina, both recent debt default culprits, whose economies are now doing very much better, thank you. Sure you can’t borrow from the markets for a time if you default, but that means that the government sells its debt to its citizens instead – and it sets its policies to suit its purse, since it has to. That is ultimately a good thing, not a bad thing, though the short and medium term consequences for the old, the sick and the vulnerable may well be heavy.
Greek socialism has flourished on pure (and unpayable) debt. You can’t vote for early retirement and free holidays for Joe Public if the state doesn’t have the resources to pay for those promises – and in the case of Greece it most certainly didn’t and hasn’t, but the promises and the vision of the unaffordable good life got socialist politicians elected. The ramifications of a disorderly exit by Greece and a return to the drachma will be hugely complex and its fate outside the euro will be uncertain. But then, how is that different from the present, where its fate is about as uncertain as it gets, and the citizens are rioting…
If I absolutely had to put my mortgage on a punt, a Greek default looks a far safer bet than Lucky Lad in the 3.30 at Cheltenham.
Further reading on the Greek economy, sovereign debt and trade imbalances:
- No Quick Fix for the Eurozone by Joseph Trevisani
- Defaults might be the only way to ensure the eurozone's survival by Ian Fraser (blog)
- 2011: The Year Ahead - Predicting the fate of the Eurozone by Ian Fraser and Anthony Harrington
- Ratings agencies get into the act once again over Greece by Anthony Harrington
Tags: Argentina , Cheltenham , default , eurozone , Greece , Greek debt , Greek socialism , IMF , International Monetary Fund , Mohamed El-Erian , Pimco , Russia , Schäuble , socialism , sovereign debt , Wolfgang Schauble