Greece Calls Europe’s Bluff

The analysts streaming across my screen last week all had the same opinion – Greece will vote yes, accept Europe’s terms and stay in the Euro. Well, as I write this, the early polls prove, if nothing else, that one should beware of experts bearing consensus opinions. According to the headlines at all the major newspapers the Greeks have voted OXI to more pension cuts and tax hikes. Certainly Greece’s creditors want to get paid but the terms of the deal on offer – well actually the deal expired at the end of June – were unlikely to accomplish that goal. It was a recipe for continued economic pain with little hope for gain. Greece, like much of Europe, needs pro-growth reforms and neither the current Greek government nor its creditors have produced a plan that even attempts to do that.

The immediate concern for investors is what happens now and even knowing the outcome of the vote it is difficult to predict. Germany and the leaders of Europe face a very difficult choice, with nary an appealing option. On the one hand, Greece could default on their Euro debts and go back to the Drachma. Their creditors, which are mainly European public institutions such as the ESM, would be forced to write down the debts. And since they are public institutions, that means the public would take the hit. Theoretically at least, European governments would have to issue debt to cover the losses, including recapitalizing the ECB. If you think European QE is having a positive effect, a Greek default would all but neuter it as it would be used to buy up the bonds issued to cover Greek losses.

The other option is for Merkel to soften her terms and let Greece stay in the Euro. While this option is

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