It looks like Greece is going to finally call Germany's bluff. The head of the party projected to win a plurality in the June election (Alexis Tsipras, head of Syriza), wants no part of the agreed upon package and expects Germany to keep financing Greece with few to no conditions or else they will simply default on everything.
It's a shame for them they didn't do this a lot sooner when they had more leverage. German and French banks have had several years to write down or otherwise reduce their exposure to Greece.
Given this reduced direct leverage and all the rhetoric from Germany and the ECB, things may come to a head this summer.
Will Germany let Greece go the way Paulson and Bernanke let Lehman Brothers go?
If so, will they be able to contain the fallout and be able to keep Spain (and Italy) in the EZ?
I say it's 60% that Greece goes this summer and 60% that no one else does over the next year.
One thing that is 100%: we are living in interesting times.
8 comments:
For years, at least since the Mexico default, I've thought that nations borrowing money should put some of their sovereign soil up as collateral. The US should have got Baja. Greece should have a few dozen of their islands on the line here. The problem with Greeks and gifts is not breaking news.
It appears that Germany is preparing for a Greek exit from EMU. The real "Lehman event" will be Spain if it collapses.
Why would you (or anyone) think that Greece is Lehman? Lehman was a huge firm at the center of the global financial system. Greece is a small country on the periphery of everything.
That's a fascinating idea, SheetWise. Of course, it amounts to punishing the inhabitants of those islands for a crime committed by the government that is getting rid of them. And I don't know about Greece, but I know there's some parts of the US you could get rid of and the rest of the country would cheer.
If you want to get the incentive effects of collateral, why not make the relevant politicians personally liable for some tiny fraction of the total that's large enough to wipe them out personally if they default?
KW: Lehman was sacrificed to reduce "moral hazard" but all hell broke loose. Greece may be sacrificed to reduce "moral hazard" and all hell may indeed break loose again.
I agree with your statements but don't think they necessarily void my lovely metaphor.
KG:
Apologies for the cheekiness, but I'm trying to void that lovely metaphor -- common enough that I'm not sure you can rightfully call it yours -- in a short piece that I'm hoping to get into Foreign Policy or some place like that pretty soon. If not it'll end up on my blog.
The gist: it wasn't the puncturing of the moral hazard bubble wut dun it. It was allowing a shock to hit a central node of the financial network. When shocks hit central nodes of hierarchical networks, chaos ensues. When shocks hit peripheral nodes, the effect stays local. Greece is peripheral. At this point exposure to Greece is (probably) peripheral too (e.g. MF Global, which was exposed to Greece and whose collapse didn't cause chaos despite no bailout).
Greece is Argentina c. 2001, if that. The whole southern Europeriphery is E Asia c. 1997. Big events locally, barely noticeable globally.
KW: good luck with your piece. I'm guessing we'll get to find out who's right soon enough.
Expected Optimism --
"Of course, it amounts to punishing the inhabitants of those islands for a crime committed by the government that is getting rid of them."
It would be up to the government to relocate them if they wanted to leave. Expropriation, due compensation, and all.
"And I don't know about Greece, but I know there's some parts of the US you could get rid of and the rest of the country would cheer."
I can think of a few too -- but no pawn shop I know would take them as collateral for fear I wouldn't redeem them ;)
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