Wednesday, April 22, 2015

22/4/15: Some morning links on Greek crisis

Greek crisis is accelerating once again, predictably, given the deadlines and debt redemptions looming. So what's worth reading on the subject this am?

Start with @FT's Martin Wolf and his "Mythology that blocks progress in Greece". It is good… as a summary of key myths surrounding Grexit. But...

Myth 1: "A Greek exit would help the eurozone" and Wolf view is that it is not so because with Grexit "euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation." Now, sort of yes, Martin. But by the same token, is irrevocable - no matter what - euro a good thing? Is it stabilising to know that euro is purely political currency with membership irrespective of economic and financial realities? Is it better for a city to keep town walls shut for doctors in a plague?

Myth 2: "A Greek exit would help Greece". Here Wolf is on the money… again, sort of. "Stable money counts for something, particularly in a mismanaged country." Really? Stable money in a mismanaged economy? Is that possible? Ever heard of real effective exchange rates and internal devaluations? So much for 'stable', then. Would it not be more helpful to devalue both across real and nominal margins, rather than force all pain into internal devaluation channel?

Myth 3: "It is Greece’s fault. Nobody was forced to lend to Greece." Yeah, true… sort-ish… No one was forced, but many were incentivised to lend to Greece, including by idiotic EU (and international) risk-weighting rules on sovereign debt. Wolf is right that in 2010, "Rather than agree to the write-off that was needed, governments (and the International Monetary Fund) decided to bail out the private creditors by refinancing Greece. Thus, began the game of “extend and pretend”. Stupid lenders lose money. That has always been the case. It is still the case today." Which is an argument in favour of a default. Perhaps managed default or as I call it - assisted. But default alone won't do much to correct for internal mispricing of risk and real mispricing in the economy. That requires devaluation, so back to Myth 2 above.

Myth 4: "Greece has done nothing." Agree with Wolf here. Greece has done quite a bit. But I am a bit puzzled: "Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources." Really? Oh, ok, then - if Greece does not need additional resources, soldier on, what's the fuss?

Myth 5: "The Greeks will repay" - Agree with Wolf - this is a sunk cost fallacy. "What is open is whether the Greeks will devote the next few decades to repaying a mountain of loans that should never have been made." This is on the money.

Myth 6: "Default entails a Greek exit." Ok, agree again. But I must add here that if we do have default and no exit, then by Myth 1 analysis by Wolf, the euro will be a currency where "Each crisis could trigger destabilising speculation". You can't have a cake and eat it, Martin.

Now, EUObserver on the European salad dressing - sorry, the meetings schedule for resolving Greek crisis. First there was Friday 24th of April as the deadline, now its May 11th summit that is going to be decisive…  Read and laugh - THIS is Europe. ""What are the 70 percent [of the programme] Greece said were acceptable and the 30 percent acceptable? When we have a firm picture of that, we’ll discuss that. But preconditions for having discussions are not there”." All sounding like a dysfunctional family attempting to deal with an unpayable credit card bill amassed by the live-at-home 'prodigal' son… One note, though - this is about meetings to shore up Greece until June. This is NOT about meetings to shore up Greece for 2016-on. In other words, the entire circus is for bridging things through 2015. Thereafter... ah, well, pass the Kool-aid jug, Roger...

Talking of dysfunctional families, one can't avoid the topic of dead-beat parents… And here rolls in the ECB. "ECB to fund Greek banks as long as they stay solvent - Coeure". Coeure is priceless. Apprently, "The European Central Bank will continue to provide liquidity to Greece's banks as long as they remain solvent and have sufficient collateral, ECB Executive Board Member Benoit Coeure" said. Wait, you mean as long as Greek banks continue to have that which they don't have enough of?

"imposing capital controls was "not a working assumption" for the ECB, while speculation about Greece leaving the euro was "out of the question."" But capital controls already ARE a "working" solution, not just an assumption and the ECB is already looking at cutting back Greek banks access to liquidity supports and Constancio did already say that capital controls can be introduced, which is sort of saying that look, Cyprus does exist.

The best bit of Coeure's statement is this: ""In recent days, there has been tangible progress in the quality of the discussions with the three institutions - the ECB, the European Commission and the IMF - which can be built upon," Coeure said." Tangible metrics of quality… only at ECB.

Meanwhile, more news about ECB considering doing what Coeure says they won't do.

May Greek Gods be with Greece today, for the whole Euro area beehive is buzzing with funny stuff… qualitatively and quantitatively "tangibly"...

Meanwhile, some factuals: Greek debt exposures by countries: and across the official sector:
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