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Will Greece be in EMU at the end of 2015?
By: Marc Chandler Date: January 2, 2015, 7:39 am
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The Greek political drama is overshadowing the Russian crisis
and the plunge the price of oil. A review of old and new media
coverage suggests that many observers are repeating the same
mistake they made 2-3 years ago. We were one of the few analysts
that did not expect Greece to leave the monetary union then, and
we expect it to remain in the union now.
Investors understand economic issues but have a blind spot when
it comes to politics. Informed by the liberal and neo-liberal
economic determinism, they think politics is simply a function
of economic self-interest. This reductionist approach proved
wrong before, and it will likely be wrong again.
They see monetary union and think it is about economics. Yet,
monetary union itself is an economic answer to a fundamental
political issue: Under what conditions could Germany be
re-united with the fall of the Berlin Wall. EMU is
fundamentally a political exercise.
The euro-skeptics smell victory that has eluded them. Every
challenge the euro area faces is seized upon as evidence of the
folly of monetary union. Every problem a member faces can be
resolved by dropping out of EMU and devaluing. Let's not count
the chickens before they are hatched.
Syriza, the left coalition in Greece, is 2-3 percentage points
ahead of the New Democracy (ND). ND's Samaras heads up the
current government, which is a coalition with the ND's
longstanding rival in Greek politics, the Socialists. It is
certainly possible that Syriza will win the election on January
25 and lead the next government but it is far from a sure thing.
Greek politics are fluid, and over the next few days, former
Socialist Prime Minister Papandreou is expected to form a new
center-left political party. It will capitalize on the
rank-and-file disenchantment with Venizelos, the Socialist
Finance Minister. It is unlikely to emerge as a major party,
but it may take 1-2 percentage points from Syriza.
Greek politics very fragmented. The frustration this causes
prompted the electoral reform that grants the top vote getting
party 50 bonus seats in the 300-member parliament. While Syriza
could get the most votes, it has never reached the level of
public support that would give it an outright majority. Nor is
it clear which political parties if any would join a Syriza-led
coalition.
We suspected that Samaras' failure to secure the selection of
his presidential candidate, which has led to the early election
could see him join the quarter of the Greek population that is
unemployed. In his years in opposition, and now in office,
Samaras has alienated some members of his party, which led to
desertions to other parties. A new and different candidate for
the New Democracy could boost its chances in the election. If
Samaras remains the candidate, he will have to tack to the left
and promise stiff negotiations with its official creditors.
Greek debt dynamics were always going to a challenge when the
end of its assistance program drew near. Samaras had hoped a
smooth exit would have stolen some thunder from Syriza, but
partly because of the rise of anti-EMU parties various creditor
nations, including Germany, this path was blocked.
The position of both Greece and its official creditors has
strengthened over the past couple of years. Greece's economy
shrank by over a quarter and investment plunged by nearly 2/3.
However, the contraction is over, and the economy has begun
expanding. The IMF forecast Greece to grow by almost 3%
through 2019.
More importantly, for its negotiating position, Greece is
running a primary budget surplus of around 1.4% last year. By
running a surplus excluding debt servicing costs, means that
Greece no longer needs to borrow fresh funds. It is in
repayment mode.
The concern that a Greek crisis poses systemic risk of the euro
area as a whole has lessened. Spain and Ireland, for example,
are on the mend. The banking system is stronger, even if not
completely healthy. Officials have created greater
institutional capacity, including facilities such as the
European Stabilization Mechanism. Peripheral markets have
shown less sensitivity to developments in Greece. We note that
Italy sold ten-year bonds last week at record low interest
rates.
In heated negotiations, it is not uncommon for each side to
accuse the other of blackmailing the other. Syriza accuses the
Troika of blackmailing Greece: Either Greece cuts its nose to
spite its face by enacting even more austerity or the ECB cuts
off the life support of liquidity. The Troika itself has not
accused Greece of blackmailing it but that has not stopped
numerous observers from claiming exactly that: Either the
Troika renegotiates Greece debt, or the country will default.
What makes Greece's case different from other debtors who have
often used attainment of a primary surplus to squeeze extra
concessions from the creditors or defaulted, is that its debt is
primarily in official not private hands. Of the roughly 320
bln euros of debt, only 54 bln is in private hands. The rest is
owned by the EU collectively and individually, the IMF and ECB.
It has long understood that when at the end of Greece's aid
program, the official creditors would ease the debt burden by
lengthening maturities and reducing interest rates. There is
more room to negotiate that the media often suggests and that
the pundits as partisans want to recognize.
Other parts of Syriza's platform are frankly more difficult for
the official creditors to swallow. The budget agreements cannot
be annulled. Unwinding some of the austerity measures in terms
of civil servant salaries and pensions will destroy the very
conditions that allow Greece to negotiate, if not from a
position of strength, then a stronger position nonetheless.
There may be room for some additional government spending, but
it will not be acceptable to return to the pre-2009 period.
At the same, it seems politically naive to think that there will
be no contagion; that Greece could exit from monetary union in a
perfectly calm, orderly and non-disruptive way. That there has
not been financial contagion yet proves very little. Those
arguing in favor of the creditors think that a Grexit would be a
wake up to the other anti-EMU parties. Greece would be a bad
example that others would seek to avoid.
The risk lies in the opposite direction. If Syriza were to lead
Greece out of monetary union, would not others be emboldened?
There are parliamentary elections in five euro-zone countries
this year (Greece, Estonia, Finland, Portugal and Spain). On
New Year's Day, Italian President Napolitano indicated
intentions to resign following Italy handing over the rotating
EU presidency to Latvia. This presents an important challenge
for Italy, where Renzi's structural reforms efforts have been
bogged down in Italian politics.
Podemos in Spain has come from nowhere to lead the polls, and
its agenda is not very dissimilar to Syriza in terms of
unwinding austerity measures. Would Podemos be fearful of a
Grexit or would it be like a shot of adrenalin and
encouragement. The risk of political contagion may very well
prove to the channel of economic contagion.
The Greek people have withstood significant human and social
costs. There is ow light at the end of the long tunnel.
Exiting the monetary union would trigger a new political and
economic crisis in Greece. Unemployment would rise, the economy
would contact. In an unprecedented way, it would default to the
IMF, ECB and EU and several countries that made bilateral loans.
As was the case before, and it remains true now--inside EMU is
difficult for Greece, but outside would be hellish.
Marc Chandler
Marc to Market
www.marctomarket.com
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