Thursday, 19 February 2015

Greece coming to an inflexion point

It's all coming to a head in Greece. They are borrowing to service their €316bn national debt and also borrowing to keep their retail banks funded as Greek citizens withdraw their savings; borrowing from the "troika" of IMF, ECB and EU. About one third of all savings has been withdrawn so far; the withdrawal rate is about €400m per day but is actually tapering off a bit.

The Greek government has €3.3bn left on its line of credit at the troika.

So the Greeks have about a week to ten days before they hit the buffers. Then the Greek government has two options: 1) agree to German demands and ramp up the austerity and the credit limit will be raised, or 2) keep their election pledge to end austerity and the credit card will be torn up.

They do have one tiny glimmer of good news: they have abolished their primary deficit so they do not need to do any new borrowing to fund their day-to-day expenditure. Of course, they still need to sell new bonds to replace old ones that are maturing, ie, roll over the current debt, and they do need to borrow to pay the interest on the existing debt.

It's beginning to look like they will take option two.

At which point they will default on their national debt; stop paying the interest or even redeeming bonds when they mature. This is the "big stick" they have to wave at the world. But it's not a massive stick - the world can sustain a loss of €316bn. The downside to defaulting on the debt for the Greeks is that their High Street banks will run out of cash almost immediately, and without money modern society closes down pretty much immediately.

The "right" move after taking option two would be to leave the euro. The problems here are: it doesn't look like they've made any preparations to leave, printed up a new currency etc, and in fact the Greek people want to stay in the euro; understandably, no one wants their good money taken away and replaced with bad money.

But leaving the euro would solve the absence of cash problem, and would allow devaluation which would kick start the economy. As this blog has mentioned before, the Greeks are very lucky in that their main foreign-exchange earning assets are inexhaustible; these being: sun, sand, sea and culture. Tourism is the bulk of their GDP (plus some  shipping and a few olives) and when Greek holidays become cheap people will flock to Greece (just like they are not flocking to Switzerland anymore.)

So if we're looking at a hurried, unplanned "Grexit" it's going to be messy. Without a new currency ready to roll they will have to impose withdrawal limits at the banks and capital controls to stop money leaving the country. For a time bills will go unpaid and salaries will not arrive.

Ironically, to prepare for this, it would be best to max out the credit card before pulling the plug. The more cash in the economy the better it will survive when the ATMs run dry. So the Greeks should take that last €3.3bn before saying so long suckers, we're leaving.

Then one must ask, once the credit card has been torn up what other sticks do the troika have? And the answer is basically, none. They could in theory threaten to kick Greece out of the EU itself, but realistically they are not going to do that. So the Greeks could be sitting pretty a few months down the line - effectively debt free, no possibility of acquiring new debt, its own currency so all liquidity problems solved, and a buoyant tourism-fueled economy taking in euros and giving change in "new" drachmas.

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