Transfer unions and contagion

Whether or not partial or whole Grexit prompts contagion will depend on the forces in favour of a transfer union amongst the remaining members.  Syriza has been talking up the risks of contagion, describing it as a near certainty, because this was its main bargaining chip in seeking easier terms from the creditors.  Unfortunately for them, so far at least, all the data that has come out has pointed to there being no run on other sovereigns.  This implies that markets think that the forces in favour of the risk mutualisation required for calling the markets’ bluff (that would take place on the ECB balance sheet) are healthy.

This might seem surprising, since one way of looking at the current impasse is that the Greeks are asking for terms that might have existed if there were a transfer union in place beforehand.  And the creditors are objecting, because from their perspective they did not sign up to a transfer union.

However, as Chris Giles pointed out when he circulated my last blog post, it may be easier to engage in transfer union behaviour [transfer unity?] once the outlying or dissenting former club member is out of the picture.  The previous reluctance fades because the new core membership worry less that they will end up on the wrong side of the union, since, ex ante, all of them look more similar.  The new members start to resemble Rawls’ hypothetical individuals in the original position, less sure who it is who will be unfortunate enough to have to dip into the pot they are proposing to fund together.

The other force propelling this kind of integration is, of course, the realisation that the current difficulties were caused by not having it in the first place.  It doesn’t seem cut and dry that this would be a force for togetherness.  The lesson might be that it is either all or nothing as far as the transfer union goes.  In which case enough might choose ‘nothing’ to cause disintegration.  But, so far at least, this is not what is being concluded by investors, and that does not augur well for Syriza’s current strategy.

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3 Responses to Transfer unions and contagion

  1. am says:

    http://www.irishtimes.com/business/markets/italy-sells-6-8bn-in-debt-despite-continuing-greek-crisis-1.2268012
    This may be the first toe in the waters of contagion since Greece imposed capital controls. Seems comfortable enough for Italy.

  2. eric says:

    The probability on contagion is dependent on the “success” of the Greek economy after
    Grexit. If positive, political pressure for exit will grow.

  3. Costas says:

    Hi Tony,
    I guess the issue of contagion, if any, will become clearer next Monday. The referendum plan is not helping anyone. Indeed, a “NO” vote in the referendum will inevitably prolong the closure of Greek banks while keeping indefinitely in place capital controls. But even a “YES” vote will keep both Greek banks closed and capital controls in place for the foreseeable future. This is because a “YES” vote will be seen as a huge defeat for the Greek government. In the latter case, elections will almost certainly follow therefore delaying even further any hope for a quick agreement between Greece and its creditors.
    With best wishes,
    Costas

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