An accidental default should not lead to Grexit

10/5/2015

Discussion needed on how to refinance banks at risk of deposit flight

In the weeks after Greek voters propelled Syriza into government, it became fashionable to frame the events ahead in the language of game theory. Seen this way, Greece was deploying Odyssean guile against an array of European antagonists. Much was made of how Yanis Varoufakis, the new finance minister, had built an reputation on the study of game theory.

If some sort of game is afoot, it is often unclear who plays on which side, the nature of the rules or even the objective. Yet while Greek finances are a mess, the approach to resolving them should not be so hard to spell out. “Grexit” cannot be regarded with equanimity, by Greece least of all. No eurozone country enjoys the robust health needed to handle the fallout with confidence. Regardless of the firewalls erected since 2012, any departure from the single currency would raise ineradicable doubts over its very future.

All sides should agree on the need to boost Greece’s growth, since without some improvement an already crushing debt burden will soon spiral out of control. Here the antagonists play by very different rules.

Greece’s official creditors insist that reform precedes the disbursal of financial relief. This hits two roadblocks. The first is Syriza’s past vows to do the very opposite and oppose any such reforms. The second is that the fiscal rigour and deregulation called for could damage growth in the short run.

Mr Varoufakis would rather focus on growth first. His vision for achieving this is strikingly different — and has led to growing impatience among his eurozone peers. When Greek prime minister Alexis Tsipras sidelined his finance minister from bailout talks, the stock market soared on the news.

Debt relief, a term easily swapped with the phrase “default”, makes for another fuzzy area. Few of Greece’s European creditors would support cutting it further slack, particularly given recent provocations like a plan in Athens to rehire thousands of public sector staff. Greece anyway vows to pay back every penny, although when and on what terms is never made clear. Only the IMF has had the courage to suggest that Greece’s deteriorating growth might render some sovereign debt write-off inevitable.

Deliberately planned debt relief may not be an acknowledged element in anyone’s game plan, but such demands are now flooding into the Greek finance ministry — salaries, pensions, payments to the IMF — that accidental default cannot be discounted. Inspired last minute improvisation can only get Athens so far. Even if this weeks’s meeting between finance ministers secures the release of €7.2bn, it will only keep the show on the road till June. Heavy repayments to the ECB in the months after would require yet another bailout, for which there may not be the time for Europe-wide agreement.

That Greece might default should never be discounted: the very nature of credit requires that sometimes a debt goes unpaid. But abandoning a currency is another matter. Its negotiations with the rest of the eurogroup would be less fraught if they all worked to ensure that its banks are better insulated from the consequences of accidental default. If Grexit can be openly discussed, so too should measures to refinance banks at risk of deposit flight, put them into resolution, or even capital controls.

The 18th century wit Samuel Johnson once remarked that “when a man knows he is to be hanged in a fortnight, it concentrates the mind wonderfully”. The possibility of Grexit has not had a similarly useful effect on Greece and the eurogroup. Their minds should be more focused upon avoiding it.

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