Tuesday, February 03, 2015

Europe's Greece Problem

We are talking here 3 possibilities:

1. Greece defaults and abandons Euro.
2. Greece defaults but sticks with Euro.
3. Greece enters into some kind of compromise with Troika.

The thing is the middle option is not viable. But that is where Syriza is going - they essentially do not want to pay for the mountain of debt unless it is reduced with the full knowledge that minus the debt and interest payments, their current budget is balanced. That is; so far as 'cash' goes, it collects as much as it needs to pay for the immediate government expenses.

But alas the modern national economics is so simple. The problem is apart from 'cash' coming and going from government accounts, there is a basic thing called liquidity in the market so that private economy continues. Greek banks have around $160 Billions of deposits and so far 10% of those are withdrawn. Banks generally have anything between 5% to 20% as Capital (in various tiers) of their assets, that is loans. Most of the deposits are deployed, presumably in productive loans; including loans to state. These loans cannot be rescinded just because Bank's depositor's are asking money back, which they can indeed do at anytime at nominal fees. Hence, banking is essentially the business of confidence and right now ECB is underwriting that confidence for Greek banks.

Anytime insults from Greece exceeds the tolerance level of Chancellor Merkel, we are likely to see ECB pulling the rug under Greece, no matter how much smart Greece's finance minister is. Syriza folks are convinced of Paul Krugman Theory that austerity has to be avoided. There are couple of aspects of that theory:
- Will continuing to throw money at public sector workers, who in all likelihood are not generating any value, is still economy saving 'demand generating' spending?
- And when all of this marginal money to be pumped as stimulus (remember, Greece is primary budget surplus only on the current lower state revenue, it would not be having any additional money which Syriza wants to throw as per it's mandate) is all going to come from Troika, what does Greece have to give as 'collateral' to these loans? Especially since there is no creditworthiness left for Greece in international capital market.

It would have been a different matter if Syriza and Greece political class, as well as Greek national will, had some smart ideas to direct 'stimulus' money in more productive ways rather than just throwing it on redundant  public sector employees. May be Krugman's point is it does not matter - the goal is to generate demand and if it means 'spraying the money'; so be the case.

Because Greece is not printing its own currency, its hose to 'spray this money' is controlled from Frankfurt. That is the fundamental difference. Bernanke Fed could print Trillions of Dollars at will and allowed Obama Administration to spray it effectively and so as to take USA out of Great Recession.

With Greece, Syriza mandate is NOT to choose the option number 1 i.e. default and go for it's currency. Greeks do not want to give up Euro since they do not trust their own politicians in managing their own currency or stewardship of their monetary policy.

It may be all right to 'win' an election by boasting that Greece would not pawn its 'sovereignty' to Troika and it may be indeed the case that Troika at some level increased misery of Greece; but in absence of any hard collateral and willingness to shun bombastic rhetoric; acceding to Troika demands is the only choice. Indeed that could look like 'selling of Greece sovereignty' to Syriza's voters. But after all the lender has more vested interest in getting back her money or avoid Spain and Italy springing up these ever growing demands of debt write offs. Keeping this natural alignment of the lender intact and compromising with Trioka seem to be most natural choices here for Greece. 

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