Greece Walks Out After 45 Minutes, Talks Collapse; Default Math: Who Foots the Bill? How Much?

Congratulations to Greece for walking out of 11th hour Troika talks. Greece is going to default sooner or later and the sooner the better for everyone involved.

The Financial Times reports Greek Default Fears Rise as ‘Eleventh-Hour’ Talks Collapse.

Talks aimed at reaching an eleventh-hour deal between Greek ministers and their bailout creditors collapsed on Sunday evening after a new economic reform proposal submitted by Athens was deemed inadequate to continue negotiations.

Greek negotiators, including Nikos Pappas, aide-de-camp to Prime Minister Alexis Tsipras, left the European Commission only 45 minutes after entering.

In a sign of how far attitudes had shifted, Sigmar Gabriel, Germany’s vice-chancellor and head of the country’s Social Democratic party — long seen as a more conciliatory political group — penned an article for Monday’s daily Bild newspaper in which he warned patience towards Greece in Germany was running thin .

“The game theorists of the Greek government are in the process of gambling away the future of their country,” Mr Gabriel wrote, in a thinly veiled dig at Yanis Varoufakis, the Greek finance minister who is an expert on game theory. “Europe and Germany will not let themselves be blackmailed. And we will not let the exaggerated electoral pledges of a partly communist government be paid for by German workers and their families.“

Gambling Away the Future

I have no love of radical left governments, communists, etc. But I do commend anyone willing to tell the IMF to go to hell. I also commend anyone bright enough to avoid suicide, and that's what accepting the offer would mean.

If Greece defaults, as it should, it will have the opportunity to cram the entire bailout straight down the throats of the nannycrats and the IMF. All it has to do is initiate genuine reforms, make an alliance with Russia, cut taxes instead of raising them, and thrive.

Alas, the odds of genuine reform is slim, but at least it's possible. Raising taxes to run the required current account surplus to pay back creditors while Greece goes into a 10-year depression is not going to happen.

At this point, any alleged gamble is better than a zero percent chance of success.

Farce of the Day

The Bild statement “Europe and Germany will not let themselves be blackmailed. And we will not let the exaggerated electoral pledges of a partly communist government be paid for by German workers and their families“ is the farce of the day.

I commented at four years ago that German taxpayers would foot the bill one way or another. Their choice, like it or not, is the same now as it was then: Write down Greek debt voluntarily, or Greece would default on it.

This position is not taking sides, it is simply a mathematical certainty based on a simple truism, what cannot be paid back, won't be paid back.

Nothing to Lose

On June 11, in "Air of Unreality"; "Do You Feel Lucky, Punk?"; Who Has the Gun? I said Greece has nothing to lose by defaulting.

I quoted Bob Dylan "When you ain't got nothing, you got nothing to lose."

I emailed that post to Financial Times writer Wolfgang Münchau but he did not respond. I do not know if he read my email or not, but I do know he agrees.

Today Münchau writes Greece has Nothing to Lose by Saying No to Creditors.

So here we are. Alexis Tsipras has been told to take it or leave it. What should he do?

First, contrast the two extreme scenarios: accept the creditors’ final offer or leave the eurozone. By accepting the offer, he would have to agree to a fiscal adjustment of 1.7 per cent of gross domestic product within six months.

My colleague Martin Sandbu calculated how an adjustment of such scale would affect the Greek growth rate. I have now extended that calculation to incorporate the entire four-year fiscal adjustment programme, as demanded by the creditors. Based on the same assumptions he makes about how fiscal policy and GDP interact, a two-way process, I come to a figure of a cumulative hit on the level of GDP of 12.6 per cent over four years. The Greek debt-to-GDP ratio would start approaching 200 per cent.

My conclusion is that the acceptance of the troika’s programme would constitute a dual suicide — for the Greek economy, and for the political career of the Greek prime minister.

Would the opposite extreme, Grexit, achieve a better outcome? You bet it would, for three reasons. The most important effect is for Greece to be able to get rid of lunatic fiscal adjustments. Greece would still need to run a small primary surplus, which may require a one-off adjustment, but this is it.

Greece would default on all official creditors — the International Monetary Fund, the European Central Bank and the European Stability Mechanism, and on the bilateral loans from its European creditors. But it would service all private loans with the strategic objective to regain market access a few years later.

The second reason is a reduction of risk. After Grexit, nobody would need to fear a currency redenomination risk. And the chance of an outright default would be much reduced, as Greece would already have defaulted on its official creditors and would be very keen to regain trust among private investors.

The third reason is the impact on the economy’s external position. Unlike the small economies of northern Europe, Greece is a relatively closed economy. About three quarters of its GDP is domestic. Of the quarter that is not, most comes from tourism, which would benefit from devaluation.

If Mr Tsipras were to reject the offer and miss the latest deadline — the June 18 meeting of eurozone finance ministers — he would end up defaulting on debt repayments due in July and August. At that point Greece would still be in the eurozone and would only be forced to leave if the ECB were to reduce the flow of liquidity to Greek banks below a tolerable limit. That may happen, but it is not a foregone conclusion.

The eurozone creditors may well decide that it is in their own interest to talk about debt relief for Greece at that point. Just consider their position. If Greece were to default on all of its official-sector debt, France and Germany alone would stand to lose some €160bn. Angela Merkel and François Hollande would go down as the biggest financial losers in history. The creditors are rejecting any talks about debt relief now, but that may be different once Greece starts to default.

The bottom line is that Greece cannot really lose by rejecting this week’s offer.

Default Math

If Greece defaults on its official-sector debt, Münchau calculates France and Germany stand to forfeit €160 billion.

And what about Spain? Portugal?

Münchau has numbers higher than my January 22, post Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited.

At that time, I had French exposure at €55 billion and German exposure at €73 billion (a total of €128 billion).

I also had Spain at €33 billion and Italy at €48 billion. Both of those numbers are likely way higher today. Even if my numbers are still accurate, where the hell is Spain going to come up with €33 billion? Where will Italy come up with €48 billion?

The answer to both questions is simple: they won't.

Loaded Gun

So who has the loaded gun and who doesn't?

If Greece is smart, it will not implement capital controls until the ECB shuts down the ELA, forcing the issue. Greece will then have the ECB and Germany to blame for the resultant controls.

By the way,  Münchau is a staunch supporter of the eurozone and I certainly am not. Yet, we both arrived at the same conclusion: Greece has nothing to lose by defaulting.

The only people who have not figured this out are the nannycrats who believe they have a loaded gun pointed at Greece, when it's Greece that really has the gun.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com