Friday, June 26, 2015

What would happen in case of Grexit?

Published on ZeroHedge

In order to “help” Greece, since 2010, we’ve seen fiscal transfers and foreign intervention into its domestic economic policies. Greece’s debt to GDP ratio is now around 180% to GDP, while a lot of the bailout cash has merely served to bail out banks, as Open Europe already warned in 2012.
A number of policy makers now wants to try something new: a Greek exit from the Eurozone. One of them is Christian von Stetten, a Member of Germany’s Parliament and of Angela Merkel's CDU. He states what a majority of Germans believe should happen: "The experiment with the Greeks in the eurozone, who are unwilling to implement reforms, has failed and must be ended". He adds that he's in favour of providing "many billions" in support so Greece can make the transition onto its own currency.

Hereunder I explore what would happen if Greece were to leave the Eurozone, through a legal fudge.
  1. Default
If Greece wouldn’t have already defaulted before it would introduce a new currency, Grexit would make it virtually certain that the country would default. It’s not wise to take out a considerable loan in a foreign currency, but that’s what Greece has done since 2001, when it entered the Eurozone. If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder.

If Greece would only pay back what it owes in a new, devalued currency, this would be considered a default. As a result, the Greek government would face higher borrowing rates in the future. In theory, the fact that it wouldn’t be burdened by an excessive 180% debt to GDP may serve as a factor countering this, giving that the financial situation of the government would look more rosy. But this ignores the second aspect of Grexit, which I’ll discuss next.
  1. The Greek banking system would be cut off from the ECB’s cheap money canal, with real austerity to follow
A default would only relieve Greece from its excessive external public debt burden, not from the exposure it has to its banking system. Almost half the “capital” in the four largest Greek banks really consists of “deferred tax assets” or discounts on future tax bills. When banks make no profit, they won’t enjoy such discounts.

Moody's has estimated that at the end of April, 32% of total assets of Greek banks were derived from central bank funding. This was 12% in September and estimates put it at close to 50% today., with bank deposits at their lowest level in 11 years, below 130 billion euro. As Greeks withdraw deposits from their banks, using the money to buy hard assets like cars, whose sales have risen, the ECB still makes sure Greek banks enjoy sufficient liquidity, by allowing the Greek central bank to create euros itself through the system of “emergency liquidity assistance” (ELA), which should only be allowed to prop up solvent banks. Some five billion euros was withdrawn from Greek banks last week, with the ongoing bank run forcing the ECB to decide on increasing or maintaining the ELA – lifeline for Greek banks on a daily basis now.

The ELA loans to Greek banks are in theory a risk for the Greek central bank, and not for the ECB, but of course any new euro which wouldn’t have been created in “normal” circumstances reduces the value of the existing stock of euros, representing a transfer to those who withdrew the cash. Also those who didn’t withdraw don’t need to despair, as a Greek euro exit would signify a goodbye gift for the Greek economy, a “dowry”, as German economist Hans-Werner Sinn has put it. With Open Europe, we already warned in March that a bankrun may drive the eurozone to support capital controls, in order to stop this. In one wants to know what would happen if every central bank in the eurozone would do what the Greek central bank is doing, perhaps it's interesting to have a look at the breakup of the Ruble zone.

ELA is not the ordinary way for the ECB to shower Greek banks with liquidity. The normal way of doing business is for Greek banks to provide the ECB with - shaky - collateral, as Greek government debt, in return for cash. As a result, the ECB has been building up considerable exposure to Greece through the so-called “Target2” payment system, which makes it again less appealing to go for Grexit.

Importantly, the ECB announced in February it will – finally - no longer accept Greek government debt as collateral, forcing banks to their last resort - Emergency Liquidity Assistance. The ECB also imposes a discount on the collateral posted by Greek banks to get their ELA cash from the Greek central bank - making it harder for banks to get the cash. Will the ECB cut off funding for Greek banks if Greece defaults? An insider, quoted by Reuters, seems to think so, saying that "If Greece declared default, everything would change. It would be very hard for the ECB to authorize financing with collateral of a debtor in default."

To make a long story short: when a country enters the Eurozone, having access to the ECB’s cheap money provision is without any doubt one of the most important elements of Eurozone membership. 

That this cheap money may one day be used by the ECB to exert political influence, can be confirmed by former Italian PM Silvio Berlusconi, who was toppled by the ECB’s ability to affect Italy’s borrowing rate, according to some. The ECB now also uses it to pressure Greece into bowing to its demands, as it has been doing to Cyprus and Ireland. Perhaps Paul Krugman may not agree with it, but in the real world there is no such thing as a free lunch.

After euro-accession - or actually since it became clear they’d join the Eurozone, given the expectation effect- Greek, Italian, French, Belgian, Spanish and Irish banks were suddenly flooded with cheap money, whereas before they faced higher interest rates. As a result, investments were being made that would otherwise not have been made, with very considerable economic distortions as a result. In the case of Greece, Italy and Belgium, much of the cash went to public spending. In the case of Ireland and Spain, it went to unsustainable private spending, ending up in a gigantic real estate bubble and bust, very high private debt rates and broken banking systems which have only partially been cleaned up. The ECB could have partially countered this, for example by not gradually loosening up collateral requirements for banks to get ECB cash over the years since 2008, but at the end of the day, it was inavoidable.

If the ECB would cut off or limit funding for Greek banks to the point where the bank run couldn't be dealt with, a bank holiday would be called. Greek banks would be restructured. Shareholders would lose everything, just like bondholders, and depositors would either lose a part of their deposits or would receive them in devalued Greek currency. Parallel currency solutions may be tried, transition bailouts may be given, but in the end the cheap money party would be over.

Most analysts of Grexit are concerned about how this “Corralito”, as a similar episode in Argentina in 2001-2002 has been dubbed, would play out, but that’s not even the most risky aspect of Grexit.

The Greek state, strongly reliant on the ECB, through the Greek banking system, wouldn’t be able to pay salaries and pensions any longer. Dismissals of public servants, cuts into their salaries to Balkan-style levels, or both, would become necessary, whether Syriza would survive in power or not. To predict that this will never happen without very serious protests isn’t hard. But depending on the size of transition bailouts, it would be possible to smooth out this process over time. Those who really care about ending the clientelist system in Greece, to which Syriza may be taking part, should rejoice. In the same way that Georgia managed to reduce state corruption and boost economic growth by simply cutting the number of government workers by 50% and reducing the state's role into the economy, Greece may achieve the same success. To end Greek access to the ECB's cheap money canal may not be a sufficient condition for this to happen, but it is probably a necessary condition. Higher interest rates would secure that Greek politicians would no longer be able to burden their citizens with ever more debt.
  1. Depreciation of the new Greek currency
As explained, the main problem of Greece’s Eurozone membership wasn’t so much the fact that it had an overvalued currency, but rather that the euro served as a massive debt machine for the country. Still, the country did lose a lot of competitiveness, contributing to the inability to serve its debt obligations, after it entered the euro. One must give Greece credit for having partially restored competitiveness, through labour market reform, rising 48 places in the World Bank’s Doing Business report between 2010 and 2015. Given that the currency would lose value, economic sectors like tourism may benefit, but this effect has already been partially achieved by the efforts to achieve an “internal devaluation”.

It should be noted that the introduction of a new currency may well fail. This happened in Ecuador, leading the country to adopting the US Dollar as its currency. Montenegro and Kosovo already use the euro as their currency, without their banks having access to the cheap money canal of the ECB. If the ECB cuts off Greek banks, Greece will become like Montenegro. The good part is that politicians then won't be able to abuse the printing press to fund state spending. The bad part is that Greece would need to rely on these politicians to restore competitiveness. If Greece would have its own currency, investors could just sell it off in case the country's competitiveness would be in trouble. This would impoverish the Greeks, but it would also make them cheaper to hire. It would make it cheaper to go on a holiday in Greece. It really is a trade-off then: Becoming like Montenegro or like Turkey.
  1. (Long term) Contagion
The process of introducing a new currency may in theory set off immediate contagion: bank runs in Portugal, higher borrowing rates for Italy. However, the ECB can just print money in order to bail out Portugese banks and manipulate sovereign borrowing rates, through QE or other various instruments.

A more likely risk is long term contagion. Grexit would set a precedent. After Grexit, once another Eurozone state would get in trouble, much more money may be needed to assure that the country would stay in, for example Portugal. This may make it less likely that Eurozone countries would bail out Portugal, in turn raising attention to Italy and Spain, increasing the chance of a complete Eurozone break-up.

On the other hand, bailing out Greece once more also comes at a cost. It will emboldens these populists in countries like Portugal and Spain who’re hostile to the strings attached to the bailouts their countries have received or continue to receive indirectly, through the ECB's easy money canal. This in turn may make the wealthier Eurozone states, like Germany, less keen to provide more bailouts. It increases the chance of a Eurozone break-up.


Regardless of whether one thinks the Eurozone should be broken up or not: if it can only survive through continuous transfers, states mingling into each other’s national policy choices, which strains once-beneficial relations between European countries, it may not be such a great idea to continue with it. Those who believe that if only we do a few more transfers, everything may turn quiet, have been trying for five years. 
There will be no calm in a transfer union which lacks sufficient political unity. But perhaps the euro can survive, without transfers. Those who believe so, and I doubt that they're right, may now try Grexit to prove their point.

Tuesday, June 16, 2015

Stop de Griekse schulden-carrousel

Gepubliceerd in De Standaard en

Onder de titel “Red Griekenland om Europa te redden”,  betoogde Timothy Garton Ash gisteren in deze krant dat de andere eurolanden Griekenland nog maar eens miljarden moeten toestoppen. Dit zal Griekenland echter niet redden. Bovendien mogen we de eurozone en de Europese Unie nooit met elkaar verwarren. Ondanks haar gebreken, heeft het Europese project de handel en dus de vrede tussen de lidstaten fors bevorderd. De Eurozone bevorderde eerder het aangaan van schulden en spanningen tussen de lidstaten. 

Zou “Grexit” een mooi spektakel zijn? Neen, maar er zijn geen schoonheidsoplossingen meer. Het zou gepaard gaan met kapitaalcontroles en het tijdelijk sluiten van banken. Het invoeren van een nieuwe munt zou tijd vergen, maar in eerste instantie zou Griekenland de euro nog kunnen gebruiken, zoals Montenegro dat doet. Dat zou betekenen dat de lokale banken geen toegang meer zouden hebben tot het goedkoop geld van de ECB. De aandeelhouders van de geherstructureerde banken zouden verliezen moeten nemen, net zoals de schuldeisers. De spaarders zouden ofwel een deel van hun geld terugkrijgen, ofwel alles, maar dan wel in de nieuwe, gedevalueerde munt.

Als Griekenland de muntunie verlaat, blijft het in de EU en krijgt het wellicht nog wat geld om de transitie te maken. Rusland zou grote moeite hebben om Griekenland te ondersteunen. De Griekse economie bedraagt 12% van de Russische economie, die lijdt onder de lagere olieprijzen. 

Wat is het alternatief? 

Griekenland heeft naar schatting zeker al 240 miljard euro aan “noodsteun” ontvangen de voorbije vijf jaar. Niettemin was de Griekse schuldgraad nog nooit zo hoog: ze schommelt rond 180 procent van het BBP.

Dat is dan nog zonder de indirecte steun die de ECB aan de Griekse banken blijft verlenen. Er is een zogenaamde “slow-motion bank run” aan de gang. Grieken halen hun geld liever van de bank, wat de autoverkoop fors aanzwengelt. 32% van de activa in Griekse banken waren eind april afkomstig van leningen door de Griekse centrale bank en de ECB. In september was dat nog maar 12% en ondertussen is de bank run nog verergerd. Woensdag dient de ECB opnieuw te beslissen of en in welke mate ze de Griekse centrale bank toelaat om zelf euro’s te creëren om die aan de Griekse banken uit te lenen, via het zogenaamde mechanisme van “Emergency Liquidity Assistance” (ELA), normaal enkel bedoeld voor liquiditeitsproblemen. Hoe langer deze crisis duurt, hoe meer euro’s er via het Griekse bankensysteem worden gecreëerd. 

Biedt een Grexit zicht op beterschap? 

Een nieuwe zwakkere munt maakt exports, in de eerste plaats het toerisme, natuurlijk goedkoper, maar we mogen de voordelen daarvan niet overschatten. Het land heeft nu reeds maatregelen genomen die de concurrentiekracht deels hebben hersteld.

Het echt grote voordeel van een Griekse exit uit de eurozone is dat Griekenland niet langer zo goedkoop zal kunnen lenen, iets wat een vergiftigd geschenk was. Voor Griekse banken, en dus ook voor de Griekse overheid en burgers, zullen de interestvoeten fors stijgen. Politici zullen de bevolking niet langer met een immense schuldenberg kunnen opzadelen. 

Is er besmettingsgevaar?

Hoewel we niet naïef mogen zijn over instabiliteit op korte termijn bij een “Grexit”, denken de meeste analisten dat het gevaar voor besmetting zich eerder op lange termijn situeert. Als een euroland in de toekomst in de problemen komt, zullen investeerders veel sneller speculeren dat er opnieuw een exit komt. Er zal dan dus meer geld nodig zijn om een land binnen de muntunie te houden.

Er dreigt echter ook besmettingsgevaar indien Griekenland een zoveelste steunpakket krijgt. Later dit jaar zijn er verkiezingen in Spanje en Portugal. Net die twee landen staan sterk weigerachtig tegen de Griekse eisen. Populistische partijen zouden er de wind in de zeilen krijgen indien de eurolanden nu toegeven aan de Grieken. Geldtransfers naar Griekenland zijn misschien nu nog te verkopen. Transfers naar elk euroland dat in de problemen komt zijn dat niet. De eurozone heeft misschien sowieso weinig kans om te overleven op lange termijn, maar zeker niet als men die radicale weg op gaat.

Geldtransfers en inmenging in binnenlands economisch bestuur zijn het recept waarmee de Europese landen de voorbije vijf jaar hebben geprobeerd om de eurocrisis te lijf te gaan. Alvast voor Griekenland heeft dit recept gefaald. Eurofederalisten zien niettemin hun kans schoon om nog maar eens voor meer transfers en meer inmenging te pleiten. Het protest daartegen neemt echter toe, in Noord-Europa tegen het eerste, en in Zuid-Europa tegen het tweede. Het lage rentebeleid van de ECB en de Europese noodleningen vormen een hoge kost voor spaarders, verzekeringsmaatschappijen, gepensioneerden en belastingbetalers. Volgens de Duitse vice-Kanselier en SPD-leider Sigmar Gabriel “is de schaduw van een Griekse exit uit de eurozone meer en meer zichtbaar.” Wat niet voor altijd kan doorgaan, moet wel stoppen.