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5 Ways the Grexit Could Go

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Maybe the new Greece will finally be meeting its ethos, rather than its pathos.

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The most commonly accepted view of the "Grexit" is that, eventually, Greece will be forced to leave the euro and maybe parts of the EU, and thus Greece will have to return to the drachma and to reinvent itself.

This probable option tends to be the view of financial analysts and economists. The geopolitical experts still hold firm in the opinion that the European Central Bank will print a massive amount of money, create bonds, and redefine growth, thereby saving Greece from leaving the euro, albeit at considerable expense to the rest of the union.

Some say Greece should not have been allowed to adopt the euro - the government admitted that it lied and continued to cover up deficit numbers. And with that in mind, it is conceivable that Greece will be kicked out of the euro since it "lied on its resume" (without being the CEO of a large Internet company). However, Greece could very well remain a member of the European Union.

Here are the different scenarios that could unfold.

1. Major hope returns. As unlikely as it sounds, let's just imagine that Greece manages to form a new government that in turn manages to collect taxes from sheltered companies while curbing the black and gray markets, stopping most cash transactions, and finally collecting due revenues, while promoting new labor laws, and promoting growth in Greece.

Others have managed turnarounds before (Chile, anyone? Peru? China?) Many different countries have managed to reinvent themselves from ruins and ashes, so why not Greece? What if they were finally owning up to their national destiny (built on 2,500-year-old pride) and embraced a different future, a healthy future? Maybe the new Greece will finally be meeting its ethos, rather than its pathos?

2. Minor hope returns. This scenario is also becoming known as "buying some time and kicking the can down the road." In a joint effort to postpone a car crash and to make sure the US avoids a roadblock during the presidential election campaign, both the EU and the US governments press hard to create a new growth policy.

The rhetoric is already well-known. It involves a weird mix of US policies (quantitative easing, massive printing by the ECB, long-term refinancing operations, etc.) and EU actions: a mix of semi-growth, including construction spending, infrastructure, and industrial initiatives, and semi-austerity, including the "Golden Rules" for most-EU countries. A "Golden Rule" is the choice expression for a constitutional mandate to have only balanced budget voted into laws, year after year.

To succeed, this plan hinges on Greece getting enough time to clean up its messy ways, to vote for fair and modern labor laws, to curb tax evasion and improve tax collection, and all the while adopt a "Golden Rule" of spending only what it collects or less.

Another road to success is for Germany to decide it is worth subsidizing the region in exchange for real changes in social, labor, and fiscal laws, and accept such subsidies in the form of euro-bunds -- a true subsidy from Germany to other economies, as the Germans' borrowing rate to fund euro-bunds would likely be higher than its ongoing national rate. Or, it could make direct loans (probably at long-term losses mitigated by potential dividends and repayments) with the goal of building real industries in Greece (and maybe even Portugal).

This solution is not vastly different from the path chosen by the US to help Mexico and integrate NAFTA. In a way, the US decided to help Mexico create industries, services, new companies, firmer labor laws and quality standards, to help Mexico help itself - thereby helping the US.

3. Feeding on others' hope. There is a less-traveled road to hope, and it hinges on every other major economic force pulling its weight, doing the work for the EU, while the EU spends even more time debating about fiscal integration, unified budget policies, and, eventually, a healthy way out of its crisis.

This option is akin to the massive efforts made in 2008-2010 by the US and China to avert a global meltdown.

Now, nothing is actually being accomplished, but every other region's hope helps feed the EU some global growth and time. That scenario could actually buy Europe some time to reassess what to do with Greece.

This option is pretty much what has been done since 2008: Lever every other major economic region and buy more time for European indecision. What's changed? Europe knows it needs to either go down the road of fiscal and federal integration or to reinvent itself without poorer, slower countries.

4. Doomed Devaluation. Is it really the end of the world if Greece returns to the drachma? There are probably 1.5 billion to 3 billion human beings alive on Earth right now who have already been through a massive devaluation in countries like Argentina in 2000, Mexico in 1996, France in 1962, arguably the US after abandoning the gold standard.

In that event, again, Greece will "survive" - Greece will be poorer but will be able to bounce back with a competitive (devaluated) tourism industry.

The scary part is that gray and black markets will thrive, tax collections will not improve, Greek leaders won't change their ways, and Greece will revert to being a poor country.

In fairness, the rest of the world will survive this scenario as well. We will likely see a massive drop in equities, stock markets, spike in panic levels, maybe a "krach" - but we will survive. A Greek devaluation might taste like the '73 oil embargo or the '87 stock market crash, or even the '97 Long Term Capital Management era - but these events are the very proof that we managed to make it through.

5. Abandon hope. Just like there is a best-case scenario and it involves major hope, there is a worst-case scenario, and I am personally worried that it is getting very little professional coverage.

I am deeply concerned about the consequences of Greek ultra-poverty on its relationships with Turkey, Albania, Serbia, Bulgaria, and other surrounding economies; about the consequences on internal politics and the obvious rise of Stalinist and neo-Nazi parties; on the consequences over Cyprus and deeply rooted issues and past feelings in the region.

My fears read like this:
  • Greek devaluation, riots, and poverty lead to many acts of violence from minorities and against them, too.
  • Populism creeps higher and higher until either Stalinists or neo-Nazis gather enough votes to disrupt coalition.
  • Turkey and surrounding countries legally buy the best assets from Greece.
  • In a populist response and a need to cement the national pride of Greece, the government unilaterally seizes and nationalizes foreign (i.e., Turkish) assets (refer to recent Repsol incident between Argentina and Spain for a textbook illustration of that crisis. Please do note that a large majority of Argentinians believe this unilateral nationalization and repossession was justified. Populist propaganda is blind and at times basic, but powerful).
  • In a show of power and measured response, Turkey seizes what's rightfully (in its mind) the rest of its Cyprus property (or blockades the main port in Athens, the Pireas port, or possibly even the military port in Athens, Elefsina).
  • In a show of power and measured response, Greece sinks a blockading ship or some other rash move. (Quick history quiz: Which wars started in the Balkans or Greece and what military disasters involved Turkey and Greece?)
Lastly, we have learned: Greece cheated on its numbers to get into Europe and does not collect proper taxes. Most of its politicians do not rely solely on a nationalistic and proud message to carry elections. We learned so much that I really hope only major hope is the solution for "Grexit."

(Full disclosure, I lived in Mexico in 1996-1997 during the peso devaluation and then again in Argentina in 2000-2001 during the Argentina crisis. People did survive, love, laugh, cry, marry, cheat on taxes, and invoke national pride, and they have not really changed their ways, but they survived).

This article was originally published on See It Market.
No positions in stocks mentioned.
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