Friday, 2 January 2015

Preparing for the Greemany high stakes game of chicken

Before the answers the questions:

  1. Why did the Greek PM Samaras bring forward to December 2014 the parliamentary vote for the appointment of the President, when it was pretty obvious that the chosen candidate will not get the minimum 60% approval required to avoid the calling of instant elections?
  2. Why did the Troika (EU/ECB/IMF) postpone to end February 2015 the payment of the last instalment of the bailout package which was due for payment by end 2014?
  3. Why are the Germans, if not the German Bundesbank, finally relenting on Quantitative Easing (QE) by the ECB, basically agreeing to the ECB buying sovereign bonds of Euro Area countries, which they formerly were strongly opposing?
  4. Why are yields on 10 year government bonds going up for Greece but coming down for Spain Italy and Portugal clearly showing that market panic is very much a Greece issue?
Sell the priceless Pantheon to save Greece?
The answer to these questions suggest that a high stakes game of chicken will soon be played between Greece and Germany and that Greece have a very weak hand to play.

Syriza has been leading the polls in Greece.   Syriza has pledged that if elected it will demand and obtain a renegotiation of the bailout terms agreed with the Troika.  Whilst Syriza leader has abandoned his pledge to “tear up” the bailout agreement with international creditors and is instead emphasising more moderate steps to address the debt load as well as his deep commitment to the Euro, it is very unlikely that a new government led by Syriza after the election of January 25th, 2015 will find much sympathy from the EU.   His demands for reversing several austerity measures involving fresh fiscal deficits at the same time as demanding substantial debt write-offs which this time will have to be carried by other Governments ( including Malta) and European Institutions like the ECB, are unlikely to be taken seriously.

It is for this reason that the last payment of the bailout package has been postponed till after the elections.   It is for this reason that the Greek President vote was brought forward.   The message to the Greek electorate is clear.  If you elect a government with a mandate to renegotiate the bailout terms and to veer off the austerity road to regaining competitiveness, than you would be voting for Grexit ( Greece exit from the Euro) and all its economic and social consequences.

It is for this reason that Germany is now warming up to QE by the ECB. QE would be a firewall against the risk of contagion onto Italy, Spain and Portugal if Greece overplays its hand and is forced to exit the Euro after defaulting on its bail out obligations and commitments.   It is for this reason that the market is already treating Greece as a story on its own without risks for other countries in bailout programmes or in excessive deficit control procedures.

The EU (basically read Germany) now feels confident enough to take the Grexit challenge of Syriza.  In so doing it would be sending a signal to electorates in other countries like Spain Italy and France where EU sceptic parties are gaining popularity and are promoting populist cessation dreams that there exist easy solutions if they leave the Euro.

I think in so far as Greece goes this is quite fair.   They elected leaders that bankrupted the country and they already benefited from  big sovereign debt write-off in 2012.   They cannot expect an eternal bailout without bringing their fiscal house in order, especially if they decide to abort the austerity restructuring just when it is starting to show some tentative green shoots.

But Germany should understand that Italy Spain and Portugal are not Greece and they deserve all the help they can get to invest in economic growth not just austerity.   QE will help but it is not enough.   What is needed is for Germany to use their fiscal space to stimulate domestic consumption and for the ECB to be allowed to monetise substantial infrastructural investment needed in Europe to stop this never ending recession.

In Malta we have been insulated from the harsh restructuring pain that Italy, Spain and Portugal had to go through to make up for their past excesses.   We may not be sensitive enough to the risks of any of these economies being hit by the Greemany game of chicken that will soon be played out.

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