Let Greece Go Under!

Eurozone better off without Greece
A Plea Against a Bail-out

I am only peripherally involved in the deliberations over a possible bail-out of bankrupt Greece, yet in the eye of the hurricane regardless. As part of a team of experts in the OECD delegation, and soon to be permanently residing in Paris, I am a known hawk, supporting the idea to let Portugal, Greece, Ireland and Belgium go under, force them to declare bankruptcy and be kicked out of the eurozone immediately. With its sovereign debt rated already on the level of Somali, Comoros Islands and Chad, Greece must not be bailed out by anyone else but France and Germany - providing their taxpayers embrace Sarkozy's and Merkel's fantasist plans. The bail-out of Greece would cost about $400 Billion, a sum only the Paris-Berlin axis powers should shoulder.

After all the papering over, the fudging and the hopes that defied experience comes the day of reckoning. Just over a year ago Greece was bailed out with a fund of 170bn dollar. Paris & Berlin were enthusiastic and content that the amount would suffice. It did not, by a long shot.

The country's problems were adjudged to be ones of illiquidity. They were not. Greece was, and is, insolvent. All that has happened since is that Greece's debt burden has risen. There was a slight reduction in the budget deficit but targets were missed. In the meantime the economy - apart from the tourist industry - has gone into freefall. The austerity prescription has not worked. Since the bail-out, 400,000 have joined the unemployment lines.

A year on it is impossible to disguise the reality of the crisis. The tensions are tearing away at the fabric of Greek society and at the foundations of the European Union. President Sarkozy, dubbed a miniature Napoleon by the media, betrayed the tension when he said: "Without the euro there is no Europe and without Europe there is no possible peace and security." Can't get more idiotic and absurd than that!

In raising the stakes to make this a crisis about peace in Europe he is trying to frighten European leaders. The French president's fear is almost certainly exaggerated, definitely delusional. There is no threat to security!

The euro would survive - even strengthen - the exit of Greece; the European Union existed before the euro and no doubt would survive a contraction the euro-zone. Would there have to be a re-think about where the EU was heading? You bet, but many would  welcome that anyway.

The likely proposition will involve a bail-out mark 2. More austerity will be imposed with the hope that somewhere down the road Greece finds the growth to reduce its debt burden. But, as I have written before, almost no economist believes it is possible, which does not prevent the rampantly madmen of the eurozone, from a daft EU commissioner down to the PM of pea-size Luxembourg to believe that hell is about to freeze over.

Even if Greece were to deliver on its proposed privatizations, even if it were to discover growth of 3% (currently -5%), even if there was to be a voluntary restructuring by private investors, even if the government were to deliver on savings, it would only dent the $465 Billion debt mountain.

So a default will be postponed now but will be back on the agenda later; a replay of the past 12 months. In the meantime private investors will shun Greek bonds, leading to interest rates for new debt 15%.

When (not if)  the default comes, it will be European governments and their taxpayers who will take the hit.
It is possible that the Greeks will take matters into their own hands and resist the terms of a second bail-out. Germany, the IMF and others have made it clear that in that case no new funds will be made available and Greece will head to bankruptcy.

The expectation has to be that the Greek parliament will vote for the new bail-out deal but the mood of the people has become volatile and unpredictable. More and more of the protesters are talking about humiliation and the loss of sovereignty. As one writer in the Financial Times put it: "Democracy was supposed to have put an end to foreign servitude."

So the Greek people cannot be taken for granted. A quarter of civil servants who have already seen their salaries cut by 20% stand to lose their jobs. History teaches that nations can reach a tipping point.

But the smart money is that come Tuesday, Prime Minister George Papandreou will win the vote of confidence. The best he can offer is: "Après moi le déluge." But even if he wins he'll be a weak leader and how, in those circumstances, he can deliver on privatisations is very unclear.

The Default Option

This is the option that European leaders, banks and European officials fear most, and is most likely. They fear it because of the threat of contagion - that Ireland, Belgium, Portugal, Spain and others will follow.

A default in itself should not undermine the European banking system. The French banks have an exposure to Greek debt of $81bn, the German exposure is $49bn. The fear lies in the unknown. What if there is a so-called Lehman moment, when the financial herd panics and lending dries up?

For Greece, of course, default would mean a run on the banks but, in any event, already there are heavy withdrawals. For a period Greece would be shut out of the markets but, outside the euro, it could devalue and build again. Nobody pretends it would be an easy option.


Paris, 19:21