The contagion risk of a later Grexit will only get worse

Statement on the viability of non-Grexit debt relief proposals

As the standoff between the Tsipras government and the Eurogroup reaches its capitulation point the option of a promise for further debt relief for Greece becomes ever more real. The likelihood of a resolution of the current conflict involving such a promise for debt relief is sparked by all parties’ interest to keep Greece inside the Euro. The inclusive anti-Grexit position is based on three general assumption: 1) Modern Europe would not even exist without ancient Greece’s contribution to enlightenment. Modern Europe should hence feel an obligation to not distance itself from its own cultural heritage; 2) Greece cannot leave the Euro without having to leave the European Union. The latter would be a serious blow to Europe’s strategic interests in a region that is at the crossroads between Europe and Asia. 3) A Grexit would come with an incalculable risk of contagion that might even spell the end of the European Union itself.

 

This statement will focus its reasoning entirely on the latter of the three assumptions since it believes that a Grexit from the Euro currency would – if handled well – not necessarily have to result in Greece’s exit from the European Union. Clearly, it should be possible to explain to all parties concerned that the tough nature of a first league currency – at least at this point in time – cannot do justice to the reality of the Greek economy. So let’s focus on the contagion risk instead which in deed cannot be denied.

Proponents of the anti-Grexit debt relief argument maintain that another serious if not total haircut by Greece’s creditors is the only adequate way forward to give Greece a fair chance to find its own footing again and to avoid risking any speculative attacks against other highly indebted Eurogroup members. This reasoning is flawed not just because of the singularity of Greece, whose Ottoman past and Orthodox heritage make it unique within the Eurogroup and explain large part of its protectionist, anti-capitalist orientations. No further than that the anti-Grexit debt relief argument also underestimates the structural imbalances which the Euro currency imposes on the Greek economy. After all, it cannot be denied that Greece will have a hard time to live with a highly valued, hard currency even after its current predicament might be resolved by a total debt relief. Even if Greece were to return to growth after a favorable resolution of its current malaise, markets would still be hard pressed to adequately price any newly issued Greek debt. So there would be new risks for Greece associated with seriously distorted interest rates looming in the background. In other words, markets would again fail to give Greece the financial conditions it actually needs to prosper in a sustainable manner. It would hence be more than likely that Greece would start overspending again and would then have be bailed out not once or twice but many more times in decades to come. And each time these bail-outs would be negotiated the contagion risk of a Grexit would have grown exponentially due to the ever higher entanglement of the Greek economy with that of the Eurogroup.

So, as nerve-wrecking and challenging as a Grexit may be this time around, both for the markets and for the Euro economy, it will only be more demanding the next time the Grexit monster raises its head again. Noah denkt™ therefore argues that there is no viable substitute for dealing with the present Grexit pain here and now. Because things will only get worse as time goes by…

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