The Great Debate UK
So we’ve got the fresh Greek elections we expected and markets, despite the inevitability that we would get here, have reacted with some alarm. European stocks have shed around 1 percent, and the harbour of German Bunds is pushing their futures price up in early trade. The Greeks will try to form a caretaker government today to see them through to elections expected on June 17.
The key question is whether the mainstream parties can mount a convincing campaign second time around, playing on the glaring contradiction in SYRIZA’s position (no to bailout, yes to the euro) and essentially turning the vote into a referendum on euro membership, which the overwhelming majority of Greeks still support. Don’t count on that. SYRIZA remains ahead in the polls.
To be able to pull it off, PASOK and New Democracy will need some help from Europe. There have already been hints from Brussels that if a pro-bailout government is formed, Athens could be given some leeway on its debt-cutting terms. But equally other voices are saying there is no more room for manoeuvre.
France's Francois Hollande used his presidential debut to frame help for Greece within his push for a European growth strategy last night, saying he hoped that could also foster a return to prosperity there. He and Germany's Angela Merkel are due in the United States for a G8 summit at the end of the week where doubtless they will come under heavy pressure to make sure Greece doesn’t bomb out of the euro zone or, if it does, that the effect is contained. Easier said than done. Given a Greek euro exit would probably require rapid concerted reaction from the EU, IMF (to shore up Spain?) and the world’s big central banks (remember the global monetary policy response after the collapse of Lehmans?), planning for that could well be bubbling below the surface at the G8.
IMF chief Christine Lagarde said last night that it was important to be technically prepared for the possibility of Greece leaving the euro zone while Finland’s prime minister said Greek euro exit would not cause the financial mayhem seen in 2008.
Having just got back from a couple of days in Hannover, I couldn’t help but be struck by the dominance of the local news agenda by two topics – and the almost complete absence of a third. Taking the British media at face value, I might have expected a city in near-panic, with people nervously scanning menus for safe dishes to order and maybe antiseptic handwashing facilities being hurriedly installed in public places. In fact, the town looked exactly as I remembered it from my last visit a few years ago, with E.coli rarely mentioned either in conversation or on the 24-hour TV news channels.
In fact, apart from endless replays of the goals from Tuesday night’s football (Germany versus Azerbaijan, a real clash of the Titans that must have been!), the news was all about the remote risk of a meltdown in the country’s nuclear power plants, and the anything-but-remote risk of meltdown in what is left of the Greek economy.
from Felix Salmon:
Greg Ip makes a very important point today, which I haven't seen made anywhere else*: even if the US debt ceiling isn't lifted, that doesn't mean the government will default.
In any given month, the government's income dwarfs its debt-service obligations, which means that the government could simply pay all interest on Treasury bonds out of its cashflow. Greg hasn't run the numbers on principal maturities, but I'm pretty sure that they too could be covered out of cash receipts—and when that happened, of course, the total debt outstanding would go down, and we wouldn't be bumping up against the ceiling any more.
from Felix Salmon:
Back in April, I noted with respect to Greece that "the bear case is terrifying, and the bull case is very hard to articulate". So it's extremely useful to have a clearly-articulated paper from the IMF, entitled "Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely", which puts the bull case much more vividly than I've seen it before.
At its heart is this table:
The idea here is that whether or not you default, you're going to have to embark upon a large fiscal adjustment in order to get back into sustainable territory. And even if you default with a massive 50% haircut, the size of that fiscal adjustment doesn't change all that much:
Forget about Greece for a moment. Just think about country X, which has lived well beyond its means for years thanks to loans from inattentive or foolishly optimistic lenders. When the crunch comes, the X-people will have to cut back on spending. And the X-lenders will generally suffer from the famous rule of banking: "Can't pay, won't pay."
If Herman Van Rompuy, the president of the European Council, has his way, Greece is not going to be country X despite its weak government, bloated civil service and poor trade position. Van Rompuy said on March 25 that a vague new support agreement should "reassure all the holders of Greek bonds that the euro zone will never let Greece fail". This default taboo should be reconsidered.
Greece's economic statistics are dubious in more than one sense. The country probably bent its figures to get into the euro zone. Now, the EU is angry that Greece has not been straightforward about the size of its fiscal deficit. But the greater doubts concern how an uncompetitive, highly indebted, weakly governed country can live with a strong currency such as the euro.
The Trojans were shocked after Greek guile got them in. The feeling may be similar at Eurostat, the European Union's statistics office. There is particular anger at Greece's increase of its estimate of the fiscal deficit last year from a tolerable 3.7 percent of GDP to a quite intolerable 12.5 percent.