There are portents of the end of days so far as the ability of the Greek government to remain solvent, avoid default on its external obligations, and remain a functioning member of the Eurozone and the ECB’s Eurosystem.
Anecdotally, those who can are shifting their Euros out of the Greek banking system, and minimizing cash transfers into the Greek economy. As we have written before, while the Greek economy is still almost a rounding error in terms of the European construct, and the system is supposedly better prepared this time around, both practically and psychologically for a “Grexit”, we think that both the markets and the “political classes” are being rather too relaxed about what would more than likely be a disorderly default, as well as potentially a serious shock to Greek social cohesion.
For example, if the Greek government runs out of Euros available to pay its domestic obligations (let alone its external ones), what would happen next? How would the ECB cope with an insolvent Greek banking system? How would Greek society deal with a situation in which there was a collapse in services? Are contingency plans already in place to print a New Greek Drachma to enable at least some semblance of a domestic economy to function?
Unfortunately, the left-wing Syriza government has demonstrated its inexperience and lack of institutional knowledge in how it has tried to negotiate desperately needed “bail-out” funds potentially available to it under the existing support arrangements; managing to “mention the War” and thus make it harder for the German government to be seen to be making concessions and provide negotiators from the dreaded Troika (ECB, IMF and European Commission) with flexibility in addressing pressing issues.
Frankly, while the potential consequences of a “Grexit” are disturbing enough, we think the larger issue is its impact on the credibility of the Euro as a currency and the cohesion of the Eurozone as a currency union, rather than a currency board. Willem Buiter, CitiGroup’s highly-respected Chief Economist, has already pointed out that the ECB’s acceptance of only partial loss-sharing by the Eurosystem member central banks- forced on it by the Bundesbank as a quid pro quo for accepting quantitative easing- arguably turns supposed monetary union into a “glorified currency board”. A “Grexit” would tend to reinforce the concern that the Euro’s position a functioning reserve and international trade currency is vulnerable to both politics and macroeconomics, and its existence reversible. This may be seen as something of a tail risk, but it is not one that should be ignored, because currency boards work until they don’t!
At Awbury, we try to take the long view; and also recognize that the real world is full of “fat tails”, rather than stylized, Gaussian distributions- so we are paying close attention to events in the EU, bearing in mind that in a number of key areas the EU has to act unanimously in order to take action.
Of course, we also believe that in times of fear, risk-avoidance and disruption those who are rational and robustly-resourced are in a good position to seize opportunities and lock-in excellent risk-adjusted returns for themselves and their partners.
-The Awbury Team