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When default is inevitable, it’s best to do it sooner rather than later

When default is inevitable, it’s best to do it sooner rather than later

Post originally appeared on Global Economic Analysis entitled, “Greece ‘air of unreality’: ‘Do you feel lucky, punk?’, who has the gun?

In the wake of the IMF walking out of negotiations with Greece, the Financial Times says the Pullout is Amid an “Air of Unreality”.

What’s Unreal?

Sure, everyone expected Greece to buckle. But what if Greece did buckle for the nth time? Greece was eventually going to default anyway.

There is not now, nor was there ever, anything “unreal” about the inevitable default.

Earlier today German officials said “European taxpayers have been generous” to Greece. What a hoot. Now, that’s “unreal”.

What’s also “unreal” is forcing €330 billion worth of debt on a tiny country, pretending that it can be paid back.

This alleged “generous” bailout did nothing but bail out banks while forcing a hellacious depression on Greece. Taxpayers have not footed the bill yet, but they will, thanks to bondholder and bank bailouts.

Some blame Greece. And to be sure Greece made mistakes. But the real culprits are the ECB’s one size fits Germany interest rate policy, the stupidity of the eurozone agreement itself, the lack of a fiscal union, etc.

Everyone knew Greece lied to get into the eurozone. They let Greece in anyway. Isn’t that “unreal”?

“Do You Feel Lucky, Punk?”

The Guradian reports the IMF walkout this way: IMF to Alexis Tsipras: ‘Do you feel lucky, punk?’

“You’ve got to ask yourself one question. Do I feel lucky? Well, do ya, punk?” The lines spoken by Clint Eastwood in Dirty Harry sprang to mind when the International Monetary Fund (IMF) announced that it had called its Greek negotiating team home from talks in Brussels.

The IMF’s message was short and brutal. There were still major differences between Greece and its creditors. There was no progress in narrowing those differences. The two sides were well away from an agreement.

The IMF, clearly, has had enough. This, then, is the IMF holding the gun to Alexis Tsipras’s head. It feels like a pivotal moment, the point where the creditors are saying “take it or leave it” and the Greeks have to decide whether the IMF really means it.

They are fed up with Tsipras acting like he is the one holding the .44 Magnum and they are threatening to pull the trigger.

This movie climaxes next week.

Who Has the Gun?

The IMF? OK. Pull the trigger.

Tsipras wants someone to blame. If he can point the finger at the despised IMF, the IMF will effectively have shot itself.

Greece has nothing to lose. The Troika does have something to lose.

Let’s look at things from the point of the best case scenario.

Best Case Scenario

  1. Greece defaults.
  2. Greece sheds €330 billion worth of debt.
  3. Greece opens up trade with Russia, killing EU sanctions once and for all (and exposing the stupidity of the unanimous nature of EU rules in the process).
  4. Greece threatens to yank US access to the US military base in Crete.
  5. Russia builds pipeline through Greece. In turn, Greece collects shipment and storage fees.
  6. Russia provides interim funding for Greece until Greece runs a primary account surplus.
  7. The interim agreement from Russia requires Greece to initiate some market reforms that will pay big dividends down the road.
  8. Greece reforms and does very well in a relatively short time frame.
  9. Italy, Spain, Portugal, get some clever thoughts of their own.

US Naval Base in Greece

US Naval Base in Greece.
US Naval Base in Greece.

The military Base is in Souday Bay, Greece.

Note the strategic location.

In August of 2013, the US Asked Greece for Military Base Access in Kalamata and Souda for a possible strike on Syria over the alleged use of toxic gas in Ghouta on the eastern outskirts of Damascus.

In 2013, Greece said yes. What will they demand to say “yes” the next time?

Nothing to Lose

From my perspective, Greece has nothing to lose.

To be sure, Greece would be far better off defaulting and reforming rather than simply defaulting. But default is the best option for sure.

Even staunch euro supporter Wolfgang Münchau agrees. See his April 19 column: Greek Default Necessary but Grexit is Not.

For my take on Grexit, please see Can Greece Default and Stay in Eurozone? Russia is the Key!

See Also

When default is inevitable (and it is), it’s best to do it sooner rather than later.

When You Ain’t Got Nothing

I offer a musical tribute to Greece. Click here to play “Like a Rolling Stone” by Bob Dylan.

It’s an excellent video, but not directly embeddable. Click on link to play.

Key Lines

Now you don’t seem so proud
About having to be scrounging for your next meal

You said you’d never compromise
With the mystery tramp, but now you realize
He’s not selling any alibis
As you stare into the vacuum of his eyes
And say do you want to make a deal?

When you ain’t got nothing, you got nothing to lose

Speece Revisited

Some will insists this is all Greece’s fault. Most others will insist it’s primarily Greece’s fault.

Actually, it’s neither of those.

I make the case in From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About “Speece” and Gold?

The big fear out of the eurozone should not be that Greece fails miserably, but rather that Greece succeeds!

Success as I have pointed out above is quite possible. If Greece were to immediately initiate the necessary reforms, I would even go so far as to say “success is likely”.

Unfortunately, I don’t believe Greece will reform.

Regardless, Greece is better off without a €330 billion albatross around its neck for the next 40 years.

References:

http://globaleconomicanalysis.blogspot.com/2015/06/air-of-unreality-do-you-feel-lucky-punk.html

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