Could a Greek euro-exit actually help Europe? Part 1

Democracy is when the indigent, and not the men of property, are the rulers.

– Aristotle

After five years of negotiation, Greece has defaulted on its payment to the IMF and asked for another bailout. Funding from the international lenders has now ceased, as well as financial assistance from the European Central Bank.1 This may be a turn for the better.

On reading the press over the last few weeks, some commentators appeared to be alarmed at how far the brinkmanship has been going between the Greek government and its three creditors.2 However, once Syriza won the Greek elections in January, it was clear that this would be a war of attrition that would go down to the wire – and perhaps beyond.

Graphs 1 & 2 – Source: Danske Bank via Marketwatch.com

This is because Syriza’s main thrust is to achieve debt relief and to halt austerity measures: two policies which the European Commission, ECB and IMF have refused to accept throughout the Eurozone crisis.3 Even if the Troika were to grant Syriza’s wishes, I imagine they wouldn’t wish to make a public declaration about it, as it would cause some red faces in Brussels, Frankfurt, Washington and – let’s be honest – in Berlin too.

My colleagues at IDEA Economics questioned on Saturday what the Troika was actually trying to achieve by taking the hard line against the Greek government.4 The simple answer to that came from German Chancellor Angela Merkel at the end of January: make them pay. She told the Hamburger Abendblatt newspaper, “There has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece’s debt. […] I do not envisage fresh debt cancellation.”5

Not like defaulting a personal loan

Such rhetoric, however, misses the point. As IDEA Chief Economist Steve Keen puts it, pro-austerity politicians are “naïve and childish” in equating an economy to a personal budget.6 If an individual has a string of mounting credit card debts, creditors sometimes come to a point where they deem it time to cut the credit line and start banging on the door for payment.

Graph 3 – Extracted from Dallas Federal Reserve.

In fact, less than 10% of the funds given to Greece in the 2010 and 2012 bailouts actually went to the government for reforming the economy and helping the vulnerable. The rest largely went to private creditors, such as banks.7

Here we are dealing with a national economy which trades with other countries. Not only that, it uses a currency in common with 18 others. Thus the negative effects of a total financial collapse of the Greek banking system could also have dire repercussions for other Eurozone members and the global economy.

Much of Greece’s creditors are public institutions; the private sector has, according to a J.P. Morgan analyst “almost no direct exposure” to Greek sovereign debt.8 In fact, as of March this year, the Hellenic Republic’s had reached €312.7 billion. According to Danske Bank, €231.2 billion was in the form of loans, with €205 billion belonging to the institutions including the IMF, the Eurozone’s European Financial Stability Facility and bilateral loans from Eurozone countries.9

Private sector banks within the Eurozone have cut their exposure hugely since late 2010, when austerity policies were first mooted, and possible contagion to other markets has also reduced.10

Should the crisis spread, however, private banks across Europe are worryingly exposed to sovereign debt; particularly that of Italy and Spain.

Continued next week.

Footnotes:

1 http://www.theguardian.com/world/2015/jun/30/
eurozone-emergency-greece-without-financial-lifeline

2 http://www.ft.com/intl/cms/s/0/baf9d212-aa17-11e4-8f91-00144feab7de.html

3 http://www.ft.com/cms/s/0/79d6da1a-a552-11e4-ad35-00144feab7de.html

4 http://www.ideaeconomics.org/blog/2015/6/27/a-sad-day-for-europe

5 http://www.telegraph.co.uk/news/worldnews/europe/germany/
angela-merkel/11381518/Angela-Merkel-rejects-debt-relief-for-Greece.html

6 http://everyinvestor.co.uk/2015/05/05/video-steve-keen-criticises-naive-austerity-politics/

7 http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go

8 http://www.marketwatch.com/story/heres-who-is-most-exposed-to-a-greek-default-2015-06-23

9 ibid

10 ibid