The Greek exit from the Eurozone, and from the Euro currency, is back on the table. Can the can be kicked down the road further still? Are we running out of road?
Even his majesty Chief Keynesian Cheerleader Paul Krugman is admitting it:
From Krugman’s Blog:
Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
And we’re talking about months, not years, for this to play out. [emphasis added, with a shout out to the commenter over at bearingdrift who told me that LTRO was working just great]
BTW, a period of “huge withdrawals from banks” is otherwise known as a “bank run.” And as for that being the “end game,” this seems to be more deflection by his highness, as it looks to me more like “the beginning of the end game.” According to Willem Buiter, chief economist at Citi, a Greek exit would result in a “deep coercive restructuring” of Greek debt, including government debt. For anyone who doesn’t know what those three words mean when used together, they mean this: anyone who has lent money to the Greek government or Greek banks is likely to never see any of it again.
Those “anyones” who are going to get stiffed include banks in other EU nations, as well as ECB itself. Why does that matter?
It matters because of this very excellent chart over at NYT, aptly named “Europe’s Web Of Debt. Please follow link to view the chart in a readable size.
A Greek exit from the Euro and default on all Euro-denominated debt could vaporize somewhere in the neighborhood of 200 Billion Euro from the banking system. What happens next?
Again from Mr. Buiter’s piece:
In the case of a confrontation-driven Greek exit from the euro area, we would therefore expect to see around a 90 percent NPV cut in its sovereign debt, with 100 percent NPV losses on all debt issued under Greek law, including the debt held, directly or directly, by the ECB/Eurosystem. We would also expect 100 percent NPV losses on the loans by the Greek Loan Facility and the EFSF to the Greek sovereign.
Euro area membership is a two-sided commitment. If Greece fails to keep that commitment and exits, the remaining members also and equally fail to keep their commitment. This is not just a morality tale. It has highly practical implications. When Greece can exit, any country can exit. If we look at the austerity fatigue and resistance to structural reform in the rest of the periphery and in quite a few core euro area countries, it is not plausible to argue that the Greek case is completely unique and that its exit creates no precedent. Despite the fact that both Greece’s fiscal situation and its structural, supply-side economic problems are by some margin the most severe in the euro area, Greece’s exit would create a powerful and highly visible precedent. As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area.
Now go back to the NYT chart “Europe’s Web Of Debt,” and recall that unemployment in Spain right now is 24%, with youth unemployment over 50%. According to the Centre For Economic Policy Research:
…the mix of expansionary macroeconomic policies must be changed. At the current rate of accumulation of public debt, more fiscal toughness is essential, leaving only one alternative for demand expansion, that is, more relaxed monetary policies.
Realistically, such policies will produce a depreciation of the exchange rate, an impossible condition if Spain is to be a founder member of a European monetary union. But if sustained growth requires currency depreciation, then it must be allowed to happen.
As everyone knows, “more relaxed monetary policies” and “currency depreciation” are code words for “printing money.” And since ECB rules absolutely forbid members from printing money, guess what Spain does next?
No more Cookies For Dinner, I suppose.