A sharp note this morning by Barry Bannister (STIFEL) is worth sharing. We thank Barry for giving us permission.
Despite all this posturing over Greece and “Grexit” risk, I doubt Greece will be allowed to leave the eurozone. That is because leaving the poorly constructed euro (i.e., monetary union without fiscal centralization, such that credit is mispriced locally and the fiscal “backstop” has no control over bad behavior) would be the BEST thing that ever happened to Greece and the WORST thing that could ever happen to the European Central Bank (ECB). In hindsight it appears that the ultimate purpose of transferring most Greek liabilities from the private sector to official sector creditors 3 years ago was to facilitate a two-step write-down, 2011-12 and 2015-16E. The Greek strategy of a snap referendum on the austerity program is a good one, as is the game theory of taking this down to the wire. In the end, as J. Paul Getty said a century ago, “If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.”
Defaulting on external creditors and honoring domestic debts would probably allow Greece to grow. About 75% of the Greek economy is domestically reliant and unaffected by access to external credit, and the externally reliant part, which is tourism, would benefit from a cheap Greek currency (drachma). For its part the ECB cannot afford the hit to its credibility and the great unwind of its raison d'être, which is the euro, by allowing the precedent of an exit door. They are aware that Portugal’s debts are probably unsustainable, large Spanish banks are reliant on tax credits for capital, Italy has uncompetitive labor markets and demographically unsustainable debt and France has long term fiscal problems, to name just a few maladies. Greece is not a backwater like Argentina (which defaulted in 2001) and would have no problem obtaining bridge loans, possibly from China and Russia, given Greece’s geopolitical location in the eastern Mediterranean. That is why the U.S. has been ringing alarm bells over what is yet another European crack-up.
Besides the creditor risks I just listed, the Greek debtors probably wish to remain in the eurozone as well. There are two reasons why both the rich and poor among Greeks and other peripherals have wished to stay in the eurozone despite domestic hardship from austerity: (1) The poor obtain access to the generous EU social welfare schemes and protections of the "rich nation's club" and (2) The rich obtain security for their savings by ceding monetary control to an entity (the ECB) with more credibility than the thieves who ran most southern European countries in the centuries prior to the euro’s inception. Most peripheral European states were run by dictators well into the 1970s (Franco in Spain, Salazar in Portugal, a Greek military junta until the mid-1970s, etc.) and memories are long. So the euro will survive, but not without debt write-offs. Those in Core Europe and successors who made loans to Greece need to learn that "A fool and his money are soon parted."
Related podcast interview:
Update on Greece With Frances Coppola
