Sunday, July 5, 2015

Possible scenarios for Greece and the Eurozone

In my reading, the message that the Greek people is sending to the Europeans is the following: We want to end insecurity one way or another. Either take your decision and kick us out, or if you don't, start making real investments for growth in Greece. But whatever you do, give us a long-term perspective so that we can start working on this. Now you might question if a clear decision, one way or another, will really end insecurity, but in my mind the sovereign has spoken: Stop kicking the can down the road.

All decisions will take time, because several Eurozone governments need to get new negotiating mandates from their Parliaments. That means, if the ECB does not extend the lifeline for Greek banks beyond the next few days, negotiations need not even begin.

Europa carrying the Euro - Statue outside the European Parliament   
- CC BY-NC Sean_Marshall

If the Greek banks survive the next few days and weeks, in my view there are several medium-term scenarios from the viewpoint of the Europeans:

Scenario 1) Announcement of a haircut for Greece, probably over time and conditional on real structural reforms. This would be the responsible choice and Cyprus has shown leadership already, but this means a loss of face for those politicians who promised their electorates full repayment. They will need to suggest the haircut to their electorates and Parliaments in a way that doesn't lead to massive resentment. But the truth is: If the creditors do not agree to a partial voluntary haircut, a full unwanted haircut will come along with a Grexit. But even if our politicians have the courage to voice this message, Scenario 1) still carries an incalculable risk about Portugal, Spain and Italy. They might ask for a haircut themselves, and a European debt conference would have to be called. Would this be the end for the Eurozone?

Scenario 2) Stopping all discussions and all financing immediately, kicking Greece out and redoubling support for the "good" reformers Italy, Spain and Portugal while sending humanitarian aid to Greece. Message: Greece didn't play by the rules, and we prefer a strong Eurozone without Greece to a weak Eurozone with Greece. This would lead to a total haircut for Greece but at the cost of a Grexit and probably massive humanitarian hardships. This is what the populists in the Northern European countries have asked for all the time - but I doubt the Eurozone governments want to take responsibility for such an irreversible decision.

Scenario 3) A solution somewhere between Scenarios 1) and 2) which allows Greece to stay in the Eurozone. But I suspect that any deal must include some sort of a haircut or else Tsipras will not agree. Are the creditors willing to agree to a haircut?

Scenario 4) Kicking the can down the road again, bleeding Greece out: starting negotiations but without coming to an agreement, stopping ECB emergency loans and waiting until the Greek banks run out of money and disaster runs its course. This would lead to a Grexit as in Scenario 2, except that the Europeans can deflect the blame ("we tried all we could, but the Greek government didn't agree").


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