Back in 2012, I’ll admit that I fully expected Greece to leave the eurozone.
The way I saw it, if Greece voted for Syriza (who were explicitly anti-euro at that point), the rest of Europe would have no option but to let them go.
The ensuing currency chaos would discourage other troubled nations from jumping ship immediately. And the upheaval would give the Germans a face-saving reason to allow the European Central Bank to start printing money.
As it happened, Greece didn’t vote for Syriza that time. The eurozone tottered along for another few years.
But now we’re at another crunch point. Syriza are in charge now. And neither they nor the rest of Europe seem willing to compromise to reach a deal on Greek debt.
So are we heading for a ‘Grexit’? And if so, does it matter?
The background to the Greek rebellion
Yanis Varoufakis, Greece’s rather more dapper answer to George Osborne, is a game theorist. That’s quite handy really, given the massive game of bluff and counter-bluff he’s playing with the rest of the eurozone, and Germany in particular.
Here’s what’s at stake: Greece was ‘bailed out’ with a massive loan from the ‘troika’ – which is the big eurozone bailout programme, backed by the European Central Bank, the International Monetary Fund and the European Commission.
Now, I put ‘bailed out’ in quote marks because really it was the eurozone banking system – German and French banks in particular – that was bailed out. Lending money to Greece gave them time to dump their holdings of Greek debt before it could go bad.
What the Greeks got in return was extra time to pay a completely unaffordable debt. Along with a bunch of advisers from the troika telling them how to run their country.
Now, I don’t think that anyone can deny that Greece is a country that would benefit from reform. And it was very naughty to hire Goldman Sachs to sneak them into the eurozone in the first place. But it can’t be much fun to go from boom to bust, and only then realise that the price of admission to the eurozone was your right to self-determination.
So you can see why they plumped for Syriza this time around. Syriza are basically saying, “this debt is unpayable, we want it to be reduced”. Meanwhile, we’re going to reverse lots of the cuts and reforms made at the behest of the troika.
Equally understandably, the rest of Europe is none too happy about this idea. Why should Greece get a free pass when Ireland and Portugal – among others – have shouldered burdens once viewed as equally unpayable with barely a murmur of discontent?
And if Greece gets what it wants, who’ll ask next? Maybe someone with real clout, like Spain or Italy.
So it’s little wonder that, so far, talks have come to nothing. The next big discussion is at an emergency meeting of eurozone finance ministers tomorrow.
What if Greece actually wants to leave the eurozone?
The assumption so far – and it’s one I’ve made myself – is that a fudged compromise will be reached. But what if that’s not the goal? What if the rest of Europe has had enough? And what if Greece actually wants a politically acceptable way to get out?
After all, if your goal is to ditch the debt and be allowed to run your country the way you want to, then exiting the eurozone is a quick way to do it.
Your voters might take issue with that. After all, that’s not why they elected you. But as Brian Dennehy of FundExpert.co.uk points out, “intransigence by the rest of Europe and the troika will create a smokescreen behind which Greece can exit the eurozone. The Greek voters will sense that their government has made a reasonable proposal, rejected by the nasty Germans.”
The question then is – will they be allowed to go? Or will Europe back down?
One argument against Europe letting Greece go is that it would start a domino effect. But I’m not convinced. Certainly, in the medium term, leaving the euro would be good for Greece. Its new currency would plunge, but smart, bold investors would snap up Greek assets for a song. Tourists would mob the place.
Growth wouldn’t be long in coming. And history suggests that before too long, the chronic amnesiacs of the global bond market would decide that Greece wasn’t really such a bad credit risk after all.
But there’s a heck of a pain barrier to get over before you reach that happy destination. And that’s probably enough to put others off. How many voters really want to risk capital controls being imposed, their savings converted into a much weaker currency, and their banking system wobbling spectacularly?
In short, we might be looking at a scenario where both sides are pretending to be reasonable and painting the other as the bad guys, because both sides want a divorce, and they just have to make it look as though they tried as hard as they could to stick with it.
The fall-out from a Grexit
So what if Greece does actually leave? You probably wouldn’t want to have money there. Not in the short term. (Although if you’re looking for a holiday home, you should probably be praying for the return of the drachma).
As Dennehy points out, “no one knows what might be the impact of the write off of Greek debt… there is €40bn of Greek interbank debt – who is holding that baby?”
On that front, I’m not so concerned. I’d expect a Grexit to trigger no-holds-barred intervention by the European Central Bank. But there’s no doubt that there’d be panic in the short run at least.
I’m still happy to hold on to my European stocks – but I’ll also be looking for some very tasty buying opportunities if Greece really does walk away.
My colleague Tim Price has been looking at the potential for chaos from the eurozone – it’s worth checking out his report on the topic here.
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