Crunch Time as Greece’s Terrible Deadlines Loom

By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit

Since the election of Syriza, the pressure on Greece has been cranked up to almost unbearable levels. The first shot across the bow came from the European Central Bank’s Master of Ceremonies, Mario Draghi, who warned that if Greece didn’t start behaving itself (i.e. stop all this silly talk about representing voters and restructuring or auditing the country’s wholly unpayable debt), the ECB would, as of February 11th, sever a large chunk of the country’s monetary supply lines.

Should Draghi follow through on his threat, Greek banks will, as of next Wednesday, have to get their daily dose of liquidity from the Bank of Greece instead of the ECB – and of course at much higher interest rates! Draghi’s threat is a stark reminder of just how dependent Greece now is on the whimsy of a wholly undemocratic, unaccountable, non-independent, Goldman Sachs-infiltrated banking institution – an institution that, thanks to the banking union hurriedly and stealthily rushed through last year, is now the sole supervisory force of over 80% of Europe’s banking industry.

If Draghi’s MAD threat is not enough to force the Greek government back into strict compliance of the Troika’s law, the Eurogroup Chairman Jeroen Dijsselbloem came up with his own 10-day ultimatum: if Greece did not apply for a bailout extension by February 16th, it would be cut off from access to Euro Zone funding. The ever-dependable US rating agencies Standard & Poor’s and Moody’s then chipped in with even more negative than usual outlooks for the Greek economy.

According to the FT’s James Robinson, despite all his expert knowledge of game theory, Greece’s finance minister, Yanis Varoufakis, has been “heavily outplayed by the acknowledged master of the financial bluff, Mario Draghi.”

He may have a point: this time around the continent’s financial institutions appear to be more insulated from future Greek tragedies, thanks in no small part to the hundreds of billions (in total, 92%) of EU taxpayer-funded “Greek” bailouts already sent their way. As a result, the markets seem, at least on the surface, barely perturbed by Greece’s latest threats to leave the euro, as WOLF STREET noted.

That’s not to say that tensions aren’t rising. As Greece’s various deadlines approach, two closely interlinked questions are on the mind of many Europeans, in particular Greeks:

  • Are the EU authorities – led by a politician notorious for once claiming, in a rare fit of honesty, that “when the going gets tough, you have to lie” – really, truly, thinking of biting the bullet and finally ejecting Greece from the Euro Zone?
  • If they are, will Greece’s new heroes of democracy eventually fold and kowtow to the Troika’s demands, as just about every national leader and government has done since the crisis began?

Both of these questions will be answered in the fullness of time; meanwhile, one question that particularly interests me is what Greece’s new democratically elected government should do (rather than what it will do)? To answer that question requires careful weighing of the potential pros and cons of Greece’s exit from the Euro Zone as opposed to its continued membership.

Pros and CONs of Staying Put / Leaving

1) Economically speaking, Greece is doomed whatever course of action its government takes. If it swallows the Troika’s bitter pill, the most it can hope for is to prolong and almost certainly deepen Greek suffering. No doubt it will be allowed to extend its repayment schedule, giving its already “bankrupt” economy (not my words, but those of Varoufakis) just enough slack to continue subsisting on a day-to-day basis and in a state of complete economic dependence – until the day, of course, that it finally defaults. Before that happens, all of Greece’s remaining assets of value – the ports, the islands, the roads, the hospitals, the new-found gas and oil fields and lastly, of course, the people (through slashed salaries) – will be auctioned off into private hands for cents on the euro.

Alternatively, if Syriza chooses the seemingly hard way out – that is, to push both Germany and Troika over the edge of their patience and to the point that they feel they have no other option but to cast the country adrift – the economic pain will be excruciating. Demand will collapse and unemployment – already over 25% – will surge. But at least it would be swift, as opposed to drawn out.

Whether or how fast the economy is able to get back on its own two feet will depend primarily on the Greek people’s ability to get their act together (à la Iceland), build a more effective system of political and economic governance and take responsibility – and that includes fiscal responsibility – for their collective future. After all, with greater independence comes not only freedom but responsibility.

The government will also have to attract new trading partners and forge new alliances. The fact that the EU is now locked in a new Cold War with Russia – at the U.S.’s behest, of course – could well be a boon. After all, the Hellenic Republic has a tradition of close ties with Russia that far predates the creation of the EU. It also occupies a perfect geo-strategic location for Russia’s latest proposed gas pipeline route into Europe (under the Black Sea and then through Turkey and Greece). It’s no coincidence that the first foreign official Alexis Tspiras met as Greek PM was the Russian Ambassador in Athens. Whether it was meant merely as a bluff, time may soon tell.

A newly independent Greece could also attract the attentions of the world’s ascendant superpower, China, which has recently got into the habit of bailing out some of the world’s more economically challenged non-aligned nations, starting with Venezuela and Argentina. Such financial assistance could prove to be an essential lifeline for Greece, but it would come at a price.

2) The political arguments in favor of Gr-exit are even more compelling than the economic ones. Lest we forget, Syriza is not a product or defender of the status quo – at least not just yet! It came to power on a platform of political and economic transformation, including an end to austerity. The party also promised to combat the rampant corruption and tax evasion of Greece’s political and economic elite.

The best way for Syriza to destroy itself is to betray its core manifesto pledges, as just about every mainstream European government does at every fresh turn of the electoral cycle. Put simply, Syriza has to choose between keeping its voters or Brussels happy. It cannot do both, since Brussels’ primary interests (achieving full-blown federal union, serving the world’s biggest lobbies, keeping the big banks whole…) are in direct opposition to those of most European people, including those in Greece.

As Varoufakis puts it so succinctly, the EU is effectively run by:

A clueless political personnel, in denial of the systemic nature of the crisis, … pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them.

If the Greek government does decide in the end not to bow to Troika pressure and as a result is expelled from the Eurozone, the biggest challenge it’s likely to face will be preserving public support while reintroducing the Drachma — especially given the pain of devaluation. One of the great ironies of Greece’s current predicament is that most of its people now reject continued German or Troikan intervention in its economy, while at the same time supporting the continued use of the euro – one of the primary causes of its economic malaise. Indeed, it’s probably for this reason that Syriza has repeatedly assured EU authorities that it would not unilaterally declare a default (and hence guarantee a euro exit) – much better for Frankfurt and Brussels to be seen pulling the kill-switch!

For the moment it seems that Syriza will hold fast to its word. “We will keep our pre-electoral promises,” says its leader Tsipras. “This is non-negotiable”. More importantly, Tsipras added that the current crisis does not just affect Greece but the whole of Europe. And he’s right: on its current course, Europe is marching as one, albeit disjointedly, towards a very grim future of disintegration and economic collapse. As opposition grows on both the right and the left, the only way Europe could possibly stay united under current conditions would be if Brussels were to snuff out national democracy in every Member State. If Syriza stays strong and refuses to give in to fear, it could be the first to show the way out. By Don Quijones

But the Greek government has lost its sharpest weapon in dealing with the Troika: the financial markets. Read…  Why the Beautiful New Greek Government Is Screwed

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  7 comments for “Crunch Time as Greece’s Terrible Deadlines Loom

  1. SteveK9 says:

    Good article. I do think Syriza has to wait for Greece to be kicked out since, as the author puts it, the people ‘ironically’ want to keep the Euro even that is what is destroying them.

    It would be interesting to hear a detailed analysis of exactly what might happen when Greece leaves the Euro … which seems inevitable. No one can predict the future but there are precedents. I hope the Greeks are getting good advice, so they can minimize the continued suffering of the Greek people.

    • Petunia says:

      If Greece decides to default it will trigger all those credit default swaps to pay off the speculators. I almost said investors, silly me. Another Lehman/AIG moment, unless the troika decides a default isn’t really a default. They wouldn’t do that, would they?

  2. Orlando says:

    DQ: stating the obvious, Greece and its’ people have won. If Greece defaults the ECB still holds Greek bonds from the bailout, so it will be capital insolvent as well. Look for the bluster to go on for the next few weeks, but the EU will cave, and give Greece what it wants. Italy and Spain will next follow Greece as they have the most developed popular opposition. Can France be too far behind? The media and their masters are blustering at the Greeks, but the Greeks have the upper hand now. Hopefully they will not blow it. Look for the EURO currency to fall as the default fear spreads.

  3. Paulo says:

    re statement: “Look for the EURO currency to fall as the default fear spreads.”

    Isn’t this what they want? Then, on this race to the bottom folks might buy their products which right now, can’t compete. I just bought a Honda MC for about 1/3 of what an over-priced European product asks for. Cars are the same with the exception of some that are blocked from entering NA, specifically high fuel mileage sub-compact diesels.

  4. Mary says:

    Insightful piece of analysis. Reading it in conjunction with Wolf’s article on American workers as “roadkill” for lobbyists and the New York Times current series on secret billionaire real estate deals gives a clear picture of just who’s in charge.

    I think it was Cormac McCarthy who said (something like) America’s not a country anymore, we’re just a big business. Following that, one might observe that Europe is no longer a community of functioning democracies, it’s just a big collection agency.

  5. Econgestalt says:

    Hi DQ. Good post.

    It does seem like Greece will be isolated politically from within the Eurozone and that portends no hope for them to seek an overt haircut on outstanding Greek debts with the EZ. The govt in Spain would want the Troika to be harder on Greece for anything else would strengthen the hands of Podemos? The govt in France would also toe the same line as the National Front looks to win the bi-elections. Any support for Tsipiras by the current regime will therefore play into the hands of the opposition. Public opinion in Germany is already hostile to Syriza/Tsipiras. Moreover if the general flavour of meetings that Schauble has had with Varoufakis is any indication, it is a tough deal to pull through. But I’m also pessimistic about China offering any respite here as they would be loathe to cross Germany. Russia could be a better prospect but how reliable can they prove while battling battles on the external and financial front.

    I believe that Tsipiras would rather leave the Euro but want to insulate himself from the backlash by showing up as a victim of the ECB’s extreme strong arm tactics. If the ECB withdraws Greek access to the Emergency Liquidity Assistance (ELA), the circumstances might just be right for that to happen. On the other hand what flummoxes me is the question – what do the Greeks want ? Most of what I have heard from sources is that a large majority wish to continue with the Euro. But should Syriza/Tsipiras back down, I do not believe their government will last too long. It would be good to know your thoughts

    • Don Quijones says:

      Hi Econgestalt,

      Apologies for the tardy reply — things have been mad busy round here the last few days. In response to your question, I believe most of the points you make are perfectly sound ones. As I’ve been writing for the last few months, while the economic situation is getting worse by the day, it will political forces that will be the Union or the Euro’s ultimate undoing. As the trend is currently developing anti-austerity parties are on the rise in the South and anti-Euro (an even anti-EU parties) in the North. As long as this trend continues there will eventually be a fatal clash of cultures.

      Geopolitically, I think there’s no discounting anything right now. Russia’s Euasian Union is growing fast, with Egypt the latest country to join. China is also keen on signing up. If it does it would cement its economic and geostrategic ties to Russia as well as send a very clear message to isolated nations like Greece that there may be alternatives to the current system. As you say, this is still a long shot but as long as the U.S. continues to draw almost exclusively on its hard power reserves, thus alienating many of its traditional “allies” with a bully’s bluster, Russia and the traditionally hyper-cautious China will be forced to become more brazen in their chessboard plays.

      The times are changing — and the changes are coming so thick and fast that they’re almost impossible to keep up with. All we can see is what’s happening on the surface; lord knows what is being said and done behind the scenes.

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