Greece

Some disorganised thoughts about what is going on.

It baffles me why Krugman/Paul Mason and others on Twitter view the referendum as logical, or a masterstroke.  It will be a referendum on an out of date document.  That was not even current at the time of the end of the negotiations.  It’s called on a complex set of questions and issues that it’s normally the purpose of elected representatives to decide.  And Tsipras is continuing to insist that it isn’t about exiting the Euro, obscuring the consequences of a ‘No’ for the Greek people.  This probably should not be surprising, since it’s an echo of the ‘have your cake and eat it’ platform on which they stood, which emphasised the paramount importance of staying in the Euro, and cancelling debt and austerity.  Which were not obviously achievable.

If the referendum was a genuine tactic to help deliver or shape an agreement, why call it so late, after the program has expired?   And this after months of having it revealed to them that other peripheral spreads were not widening, and would therefore be forecast not to react to capital controls/bank holidays, etc..  [‘Threatening to cut my nose off to spite my face doesn’t seem to be working, so I’ll actually go ahead and slice and that will really show them!’].

What I conclude is either this is incompetence by Syriza, since they did not apprehend the weakness or consequences of this play.  Or it’s a ploy to stiffen their own political position in the next few months.  Syriza is a party with roots in revolution and protest.  If they can create chaos, and pin that on malign foreign conspiracy [aided and abetted by a surprisingly willing commentariat], then they will profit from it.  In this sense, it’s a ploy that follows in a pattern of behaviour since they campaigned for office.

I hope for  a ‘Yes’ vote, even if it will be a symbolic gesture on an out of date document.  It might start some momentum toward the creation of the formation of a more benign and competent administration in Greece.  Though this must be considered a faint hope given the tainted records of New Democracy and PASOK and their leading personalities.

I don’t buy PK’s analysis that since this much pain has been endured, they may as well set off down the path of exit.  Because the Greek economy from here may well not behave like an open economy sticky price, rational expectations model with a flexible exchange rate.  There is much probability on other dynamics and outcomes which these analysis abstract from.  Involving more extreme political economy dysfunction, barter, starvation, hyperinflation tax, and much more.

Some seem to think that all problems would be over once the new currency is created and Greece has control over the printing presses.  But in fact, a new set of problems will have begun.  Sound new fiscal and monetary regimes born out of sovereign insolvency are not going to emerge quickly, if ever.  People will expect the government to try to substitute for lack of market access by using the printing presses, and this will choke off the majority of the fiscal benefits from using them, and could lead to a self-fulfilling and disastrous inflation surge.

In the past I’d forecast in a hand-wavy sort of way that there would be no contagion.  My analysis wasn’t that deep.  But it consisted of this:  i) concluding that Greece would not constitute a lesson for the larger troubled countries like Spain and Italy.  Because if a concerted run on those countries got underway then OMT/QE would be revealed to be bluffs for which there was not the political will to tolerate the risks involved in taking on the markets.  That was true before Greece, and remains so.  ii) concluding that there was no lessons for the smaller troubled countries either.  For those countries by sticking to ‘good’ behaviour [as perceived by ECB etc]  had earned the solidarity necessary for the fiscal risks involved in saving them to be undertaken by the larger more liquid cousins in the union.  This is still my forecast.

A caveat is that this is a description of healthy game-theoretic fundamentals.  Or rather, fundamentals not altered by Grexit.  So, it doesn’t follow that there is no probability of contagion, just as it does not follow that there can be no run on healthy bank.  Contagion to other peripheral sovereigns would get going anyway, even if I see it right, if enough people see things differently and decide to forecast that there will be contagion, or foreast that others will forecast that they will forecast that….

Much was made before this week of the disastrous consequences of Grexit for the sanctity of the ‘irreversible’ nature of Euro membership.  I always felt this was greatly overdone, and made forecasts of a Troika climbdown [doing whatever it took to bring Syriza round] unsound.  Because a the benefits of – the liquidity services conferred by – a currency do not flow solely or even primarily from a membership list  They flow from the nature [and the expected durability of] the rules that membership implies.  The Troika could relatively easily have preserved [and might still do] the original membership list.  But they clearly had a mind that the usefulness of the currency involved not changing the rules by too much in order to do that.

Many of the rules stink, of course.  (I hope Eurozone countries accelerate at least a Banking Union, if not a full fiscal transfer union, and surrender as much individual fiscal sovereignty as possible.  I wish the ECB’s mandates could be tightened up, to relieve it of the discretion it has over ELA and other matters; and so that it’s monetary policy mandate is more properly under the control of the committee of fiscal authorities).  But we should not be surprised at the attempt to stick by them.