[Marxism] Munchau/FT: Greek default necessary but Grexit is not
daynegoodwin at gmail.com
Mon Apr 20 02:37:51 MDT 2015
Greek default necessary but Grexit is not
by Wolfgang Münchau
Financial Times, April 19 [full text]
Until last week, discussions with Greece did not go well. That changed
when the circus of international financial diplomacy moved to
Washington for the spring meetings of the International Monetary Fund
and the World Bank. Then it became worse.
My hunch is that this show will go on for quite a while. The Greeks
want to merge the talks on the extension of the current, second, loan
programme with the talks on the new third one. For that to work they
will require temporary bridging finance to get through the summer.
This sounds like somebody has a plan. But this is not my impression. I
have never seen European finance officials so much at a loss.
The big question — whether Greece will leave the eurozone or not —
remains unanswerable. But I am now fairly certain it will default.
My understanding is that some eurozone officials are at least
contemplating the possibility of a Greek default but without Grexit.
The complexity is severe, and they may not have had the time to work
it out. But it may be the only way to avert utter disaster.
On whom could, or should, Greece default? It could default on its
citizens by not paying public-sector wages or pensions. That would be
morally repugnant and politically suicidal for the Syriza-led
government. In theory, it could default on the two loans it received
from its EU partners, though it is not due to start repaying the first
of those until 2020, and the second in 2023. It could also default on
the remaining private-sector bondholders but that would not be a good
idea. Greece might need private sector investors later.
It could also default on the IMF and the European Central Bank. The
IMF is expecting a series of repayments. The ECB wants its money back
in the next few months on debt it holds on its books. Defaulting on
the IMF and ECB is the only option that would bring genuine financial
relief in the short term. Nobody has ever done that. It might trigger
Then again, it might not. Default is not synonymous with exit. There
is no EU ruling that says you have to leave the eurozone when you
default on your debt. The link between default and exit is indirect;
if a country defaults, its defaulting securities are no longer
eligible as IOUs for the country’s banks to tender at ECB money
auctions. The same applies to any other debt guaranteed by Athens. The
Greek banks hold quite a bit of the latter category, and might find it
hard to obtain liquidity if their government falters.
So to default “inside the eurozone” one only needs to devise another
way to keep the banking system afloat. If someone could concoct a
brilliant answer, there would be no need for Grexit.
On the substance, I tend to agree with finance minister Yanis
Varoufakis: the eurozone’s economic crisis management has been
The economic case for a debt default is overwhelming. It is hard to
see how Greece can ever service its debts as agreed. Even in the
creditor countries few people are under illusions about Athens’
long-term debt-servicing capacity. Full servicing would require huge
primary surpluses — that is, surpluses before payment of interest on
debt. It would leave Greece trapped in a debt depression for a long
time. The scheduled primary surplus for 2016 is 4.5 per cent, which is
bordering on the insane. Athens absolutely needs to default.
At the same time, there is a strong case for remaining in the
eurozone. Grexit would bring incalculable economic risk to the country
itself, and would harm the EU’s geopolitical ambitions and its global
What is worrying is that the talks are not going anywhere. This is why
speculation about an agreement in the summer or the autumn is
ultimately not reassuring. Particularly puzzling is the Greek
negotiating strategy. On the substance, I tend to agree with finance
minister Yanis Varoufakis: the eurozone’s economic crisis management
has been catastrophic. Under present parameters, it is fundamentally
unsustainable. But I do not understand why he spends so much time
preaching to those who tend to agree with him at prestigious
conferences in pleasant surroundings. Should he not be working on the
hard negotiations with his European creditors, and on the two plan B
Both Grexit and the option of a default inside the eurozone would
stretch the resources of even the most organised government. It would
require military-style preparation: exchange controls, temporary
closure of land borders and airports, overnight bank recapitalisation,
and logistical planning to convey money from A to B on D-Day. Is the
Greek government really so smart it can just wait until the fateful
moment arrives, and then manage this whole process in real time with
I think I know the answer to that, and wonder whether one or more
people on both sides of these discussions may simply be
miscalculating. We may be on the verge of one of those sleepwalking
moments in European history.
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