How and Why Greece is Bluffing

Are the Greeks really going to do a Grexit (Greek Exit)?

Greek Helmet

Greek Helmet
Photo by Craig Sunter

I’ve read several news stories in the last three days about Greece leaving the euro. Also about Russia being prepared to consider lending funds to Greece if asked to do so.

However this story makes the most sense.

From Sproutmoney.com, February 1. 2015:

The new left-wing government hasn’t wasted any time and at a press conference in Athens, the new Greek minister of finance has torpedoed the existing bailout agreement between the troika (consisting of the IMF, the European Central Bank and the European Commission), citing it has no intention to honor an agreement with an organization which hasn’t been ratified by the European Parliament. This has strengthened the market’s belief there will be a Grexit in the very near future.

Cancelling the bailout agreement shouldn’t really come as a surprise as Syriza, the left-wing party which won the recent elections promised the Greek citizen it would escape from the European stranglehold. To show the Troika he wasn’t bluffing, Prime Minister Tsipras appointed Varoufakis as his Minister of Finance, a professor wo’s known to be a hardcore opponent of the bailout program as it stands.

Trying to Renegotiate the Bailout Deal

So what is Greece trying to do? It is definitely putting pressure on the European Union to re-negotiate the bailout deal the Greeks got a few years ago. The current phase of that program is expiring at the end of February and there’s no doubt the Greeks are torpedoing the deal now as there’s still a  fair few weeks before the deadline expires.

Whereas some people see this as the start of the ‘Grexit’, we aren’t so sure Greece will indeed leave the Eurozone as there are several indications they are just playing hardball. When the ECB announced it would start its Quantitative Easing program whereby it is planning to pump 60B EUR per month in the economy of the Eurozone, Tsipras specifically said he would hope that ‘the ECB would include Greece as part of its QE-program‘. This obviously raises the question why Tsipras wants to be part of QE if he’d be planning to leave the Eurozone anyway? We do believe he really tipped his hand with that remark.

Requesting a Large Debt Write Off

Secondly, Varoufakis has left the door open to re-start negotiations on a renewed deal and specifically asked the syndicate of lenders to write off a large part of the debt. This probably won’t happen as the majority of Greece’s bailout plan was financed by the other member states of the Currency Block. Can you imagine what the repercussion would be if all these other countries had to write off a large part of the sum they lent to Greece? The effect would be absolutely devastating as every single country would suddenly have large multi-billion euro deficits as a loan would suddenly be evaporated.

Obtain Longer Payback Period

So forgiving a large part of the debt is very likely a bridge too far, but the Greeks are aiming high in order to secure something less invasive. They know damn well the Euro-countries won’t accept a large write-down but there seems to be some potential to discuss a longer payback period as well as a lower interest rate being charged on the Greek debt. Additionally, it’s also very likely the ECB would agree to purchase a relatively seen larger amount of Greek sovereign bond to relieve some of the pressure on the country and thus avoiding a Grexit.

And last but not least, should Greece leave the Eurozone, the country will have some serious problems to ever tap the international capital markets again. Its economy would crumble and it would be extremely difficult to get it resuscitated. It’s also unlikely Tsipras wants to go into history as ‘the prime minister who ruined the country’, upsetting every single country in the Eurozone as well as international and national creditors. He’s playing hardball, and Greece will  definitely get something out of the negotiations. The only issue is that Tsipras must be able to tell his citizens that it’s a Greek victory over the Troika, meaning the gesture from the Euro-bloc must be big enough to make Tsipras look good.

Kitco gold price

Source

There will be no Grexit as the sacrifices would be much higher than the sacrifices which had (and still have) to be made under the bailout program. However, any renegotiated deal will also increase the pressure on the entire Eurozone as it will take much longer than anticipated to see a single dime back from Athens. And even if our assumptions on the Grexit-case are wrong, gold once again would prove to be a safe haven as the gold price jumped by $25/oz last Friday when the news hit the wires. More:

Conclusions:

It sounds like Greece is bluffing. And is using its stance to negotiate for lower interest rates and a longer payback period.

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