Wednesday, June 08, 2011

Greek Endgame?

The key players in this drama are making it embarrassingly easy to imagine exactly how a Greek default could happen this summer.

The immediate concern has been whether and under what conditions the "Troika" -- the IMF, the ECB, and the EU Commission -- would agree to give the Greek government another dollop of money (€12 bn) in July. Last Friday, the Troika seemed to indicate that they had agreed in principle to go ahead and disburse the July tranche of funds. But nothing has been finalized yet (and probably won't be until EU finance ministers meet on June 20), and public disagreements within the Troika are growing louder every day.

Consider the current state of affairs, and what we know about the members of the Troika:

1. The IMF. They have a policy of not disbursing additional funds unless they are assured that the recipient country has solid prospects of being fully funded for at least 12 months. Greece does not have such prospects. Note that the IMF takes great institutional pride in the fact that its loans always get repaid, in part because it is willing to be hard-nosed enough to stop throwing good money after bad. So even though the IMF seemed to agree to the July tranche with last week's announcement, it seems quite possible that the IMF could still back out if the other two legs of the Troika don't come to a realistic agreement covering the next 12 months. And then, of course, they'll have another chance to play coy again in three months...

2. The ECB. They have threatened sturm und drang if there is any Greek restructuring (i.e. default). They've made it quite clear that they will allow the Greek banking system to collapse if restructuring happens -- which, I've argued previously, essentially means that they are saying that they will force Greece out of the eurozone if there's a restructuring. With that threat in hand, they have placed themselves squarely in the camp of the large banks and other creditors, which may not be surprising since the ECB is in fact Greece's largest creditor.

3. The EU. Naturally, the governments of the EU are worried about the political consequences of events in Greece. That explains this week's letter to the ECB from the German finance minister, Wolfgang Schaeuble, who wrote that the German government won't support the disbursement of additional funds for Greece without some restructuring. In essence, the German government has placed itself squarely in the camp of European taxpayers, who naturally don't want to have to bear the cost of the Greek default single-handedly (i.e. without getting the banks and other creditors to share in the pain). What leverage do they have? They can refuse to contribute more money to Greece, and that is the threat contained in Schaeuble's letter.

Given this information, I encourage you to take a short multiple choice quiz.

Question 1: Are the public positions of the members of the Troika more consistent with:
(a) Three parties trying to come to an agreement on how best to prevent Greece from defaulting.
(b) Three parties each looking out for their own interests, arguing over who is going to bear the costs of the Greek default, and using whatever leverage they have to improve their own outcome in the event of default.

I think you could make an argument that either answer could still (possibly) be the right one. However, the current situation does feel very much like a typical endgame in any bankruptcy, whether personal, corporate, or sovereign: at a certain point, the arguments stop being about how to prevent the bankruptcy, and start to be about how the pain will be distributed. To me, it's beginning to feel like we've reached that point.

1 comment:

  1. Ignacio4:55 AM

    Good analysis. I think that Schaubles proposal, that includes a debt moratorium for 7 years only makes sence if it is followed by a Brady-like reestructuring plan. On the other camp the ECB apparently plays for Greece exiting the euro. Apparently, the french government aligns with the ECB on this (In other words, Sarkozy aligns with BNP Paribas et al).
    To be sure, in the case of Germany, their position will depend just on the german political game (they will have elections soon) that includes the liberals and polls on what germans think about greek rescue.
    Personaly, I align with Schauble on this: creditors, rather than state governments should bear the cost of greek restructuring.