Grexit: the jig is up!

by George Hatjoullis

Two leaked documents reported over the weekend can be read in different ways. My read is that the jig is up, so to speak. The IMF has signalled that it will not be a party to further Greek loans unless the bailout agreement has some hope of reducing Greek debt to a sustainable level. No such agreement can be reached unless some debt is restructured even if the Syriza-government capitulates on all points and the IMF is hinting that this is the case. There is no chance of Syriza capitulating. Syriza and the IMF thus have the same view. This negotiation will end in Greek default or a restructuring because it is the only way Greece can achieve a sustainable debt position. This has been true since the first Greek bailout and the ‘mea culpa’ of the IMF more or less conceded this. It is a shame that the eurogroup has not come to terms with this sooner.

The Monday morning Twitterati have also conspired to confuse the situation further following reports that the eurogroup may resort to the ‘Cyprus approach’. This obviously means a take-it-or-leave it approach rather than a bank deposit bail-in as the problem is the state not the banks. In Cyprus it was the banks not the state. Of course, if Greece defaults the ELA will be cut off and the Target2 system no longer available so a bank bail-in might become necessary. It is not however an action of the eurogroup.

So what now? First let us be clear what is the situation. Greece can hold a referendum, it can agree to all the eurogroup demands, it can prostrate itself penitently at the feet of its european ‘family’ but this will not stop default. The IMF knows and will not continue to participate in the charade. It will not lend any more to Greece. When someone draws their savings out of a bank in order to repay the bank, the latter is unlikely to want to lend again. The way Greece repaid the IMF was the last straw for the IMF. Reforms and renegotiation are irrelevant if the IMF is unconvinced and what we have learned over the weekend is that the IMF is wholly unconvinced.

Second, default does not mean exit from the eurozone. This has been explained in previous blogs. The eurogroup cannot force exit. Nor indeed do they really want to do so as this opens the can of worms of the irrevocability of the euro. The implication is that once Greece defaults, a restructuring will result and Greece will be set on a sustainable debt path. Greece may be left in limbo for a while and the Syriza government fall. A new election and/or referendum may be held. Lots of words and posturing will ensue. However, in the end, Greek debt will be restructured and Greece remain in the eurozone.