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Greeks to go back to the polls - and back on the edge

Euro group chairman Jean Claude Juncker: “This is nonsense; this is propaganda.”

“I don’t envisage, not even for one second, Greece leaving the euro area. This is nonsense; this is propaganda.”

That’s Jean-Claude Juncker, Prime Minister of Luxembourg, chairman of the Eurogroup, speaking after Monday’s EU finance ministers’ meeting. Not given to half-measures, Juncker added:

“The exit of Greece out of the euro was not the subject of our debate today. Absolutely no one, absolutely no one, argued in that sense.”

The global media is agog with speculation about what appears to be Greece’s Eurozone death throes. Like a car crash about to happen, one can’t quite look away from the chaos that has come to characterise Greece.

Greek voters will also go back to the polls after President Karolos Papoulias failed to find a way through the impasse gripping Greek political elites.

The left’s Alexis Tsipras, leader of Syriza, refused to negotiate with potential coalition partners, arguing against the terms of the EU-IMF austerity regime.

The centre-left and centre-right parties, PASOK and New Democracy, remain committed to the bailout conditions, despite the fact it cost both parties dearly in the election.

Ironically, Tsipras’ Syriza bloc finds itself in the same camp as far-right parties, such as Golden Dawn, who also oppose the bailout conditions vociferously.

The Good

Greece actually beat its primary fiscal deficit (i.e., budget deficit minus interest payments) targets in calendar Q1 2012, and through April as well. IMF and EU forecasts estimate that the primary deficit will be 1% this year, which is not as optimistic as the 1% primary surplus predicted in late 2011. But, as the late Christopher Hitchens would say, “It’s progress. Of a kind.”

The bad

Not a beautiful set of numbers, to be sure. And government revenues are down slightly (quelle surprise), while spending is down a little as well.

The ugly

But Athens also has to come up with a cool $US500 million plus today to pay 10-year bond issues, although indications are that government-less Greece will stump up the cash.

Dumb and dumber

Not to put too fine a point on it, the anti-bailout parties in Greece are behaving foolishly. It may well be that Tsipras is bluffing the Germans to see whether they will soften the austerity regime, but this is a dangerous and unpredictable game.

So, how might it turn out?

Call the bluff

The Germans may well call this bluff, leaving Athens with no option but to exit the Eurozone and the EU. German finance minister Wolfgang Schäuble has stated he “hopes” Greece will remain in the Eurozone. But he’s implacable about conditionality, although there are two things Schäuble appears to have forgotten: he’s not Chancellor Angela Merkel; and he doesn’t make the decisions.

Syriza wins the second election

All right, Alexis: you wanted this job; are you defaulting now? If so, you’ll need a copy of the Lisbon Treaty. Fortunately, they’re a free 1.2MB download. Got it? Good. Turn to Article 50.

Yes, that’s the one that says member countries can exit the EU. Not the Eurozone, mind; there’s no mechanism for that.

Would you like capital controls with that?

Right, Alexis. You are now Prime Minister of Greece. You’ve defaulted, left the EU, introduced the ‘New Drachma’ and exited the Eurozone. You’ll be wanting some capital controls with that to prevent capital flight.

Who are they? Over in the corner? Just a bunch of lawyers here to enforce your euro-denominated bond contracts. And every other Greek contract denominated in Euro since 2002.

No, they are not accepting drachma, although US dollars will be fine, coupled with an appropriate forex fee, of course. Now, Prime Minister, here’s the fax from Brussels:

  1. You will no longer receive any bailout funding.
  2. All fiscal transfers from the EU Common Agricultural Policy cease forthwith (yes, Greece is a net beneficiary).
  3. All EU structural funding is halted. Permanently.
  4. All tariffs, quotas and other barriers to trade in goods and services with non-EU members now apply to Greece.
  5. Greeks no longer possess EU citizenship or passports. Greeks are not free to work in, or emigrate to, any other EU member country, except for strictly limited periods under tourist or work visas.
  6. The EU customs union with Turkey no longer applies to Greece.
  7. All EU Framework funding to Greece ceases forthwith.
  8. The Greek government no longer has any recourse to commercial legal arbitration within the ambit of the European Court of Justice.
  9. Your 114 tonnes of gold reserves are hereby forfeited to bank creditors. Read the fine print.
  10. The EU may negotiate an exchange rate between the euro and the ‘New Drachma’ (see Lisbon Treaty, Protocols 4–14). But probably not.
  11. Countries may apply for re-admission to the EU. Let me know how you go with that one.

Greece. Is. Not. Argentina.

No, it’s not; it’s much worse. Argentina only had $US97 billion in debt when it went to the IMF in 1997, and defaulted with $US132 billion in 2001–02. It tried IMF prescriptions and dollarization (a currency board where the Argentine peso was fixed 1:1 with the US dollar).

By late 2001, following announcement of the default, Argentine inflation was running at 10% per month. By the end of 2002, the peso depreciated to around 30% of the value of the US dollar. Annualized inflation reached 80%.

Fires and riots: about the only thing Greece and Argentina have in common.

This was not a victimless default: the Argentinian middle class was effectively wiped out; violence erupted in the streets; homelessness and prostitution became endemic; and unemployment hit 25% (yes, Great Depression levels).

Argentina undertook successful debt restructuring in 2005, wiping out 60% of the red ink. Despite paying the IMF back nearly $US10 billion (in order to remove Fund conditionalities), US and other jurisdictions have frozen Argentinian assets, and Buenos Aires still has tremendous difficulty raising credit in international markets.

Why Greece could not ‘do an Argentina’

The Argentinian industrial and resource base is vastly different from Greece’s. Argentina is a highly diversified economy, with a large-scale, and export-oriented agricultural sector, significant chemicals and automotive industries, a solid taxation base [no comparison to Greece there], and is a net exporter of oil with proven reserves of 2.5 billion barrels. It’s also a net exporter of natural gas.

And Argentina also has relatively-low per capita labour costs.

Ah, there’s the rub: It also has 30% of the population living below the poverty line. Would the Greek electorate accept significantly-reduced standards of living of this magnitude under the terms of a default?

The staggering number of crass commentators and junk analysts suggesting with apparent seriousness that Greece should follow Argentina’s example suggests complete ignorance of the facts and a disturbing distortion of the realities of Greece’s economic predicament.

But if you really want to, Alexis, pull the trigger. Go on – pull it. I dare you.

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