Time to dust off those drachma blanks

Photographer: Simon Dawson/Bloomberg

Is Greece Europe's First Domino?

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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What you make of Greece's predicament depends on how you think it happened. Greece was either a drug addict whose wealthy friend and enabler loaned it money to buy recreational pharmaceuticals; now, the friend is demanding its money back even though Greece is broke, jobless and trying to kick its bad habits through cold turkey. Or, Greece was a spendthrift who cheated its way into membership in a club where it couldn't afford the dues, sponged off its friends for years, promised repeatedly to mend its ways and now wants to renege on the accumulated IOUs.

Both metaphors have merits, distortions and exaggerations, and the truth has always probably been somewhere in the middle. What's not ambiguous, however, is that the risk that Greece ends up exiting the euro -- an outcome that would have dangerously unpredictable repercussions for all of Europe -- has risen exponentially in the past few days.  

Greece's Fiscal Odyssey

The somewhat schizophrenic nature of the EU's response to Greece's overtures was reflected in weekend comments from Austrian Chancellor Werner Faymann. "I am not in favor of handing over money to the Greeks," he said in a newspaper interview. "I do, however, support negotiations over technical credit conditions so that the country will have more room to maneuver to exit the crisis."

Other officials offered similarly mixed messaging. So even as Eurogroup Jeroen Dijsselbloem said on Friday "we don't do" bridge loans, French Finance Minister Michel Sapin acknowledged today that "we must safeguard the funding, without which Greece will be at the mercy of whatever state of the markets' panic."

Investors are definitely beginning to panic. Greece's three-year yield blew past 20 percent this morning with barely a pause as it made its way above 21.5 percent. Just four short months ago, that yield was about 4 percent:

EU officials are likely to find themselves castigated at today's Group of 20 gathering in Istanbul for allowing the risk of a Greek collapse to endanger the global economy. U.S. Treasury Secretary Jack Lew, tamping down the rhetoric, said today that there needs to be a "pragmatic" solution.

There seems to be a worrying lack of willingness to compromise -- on both sides. Apart from dropping his demand for debt forgiveness, Greek Prime Minister Alexis Tsipras isn't doing enough to endear himself to his creditors. His speech on Sunday promising to raise the minimum wage and restore previous tax thresholds amounts to writing domestic checks that he can't afford to cash; demanding World War II reparations from Germany shows a lack of judgment unbecoming of the head of a European government, no matter how new he is to the job.

Nobel laureate Joseph Stiglitz, writing for Project Syndicate last week, argued that ignoring the mandate voters have given the new Greek government would seal the EU's reputation as an undemocratic institution:

Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the nineteenth century were a failure -- inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions. If Europe has allowed these debts to move from the private sector to the public sector -- a well-established pattern over the past half-century -- it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.

He's right. Greece needs breathing space, and its suggestion to swap existing debt for loans that are tied to its economic performance has merit and deserves consideration. On Wednesday, Greek Finance Minister Yanis Varoufakis meets his peers at an emergency meeting in Brussels. They need to recognize that it's impossible to predict whether losing a euro member would be a controlled explosion, or a nuclear strike that risks destroying the entire common currency project.

The EU needs to take the initiative. It should ignore Greek rhetoric aimed at the domestic political audience, and instead address the very real crisis that Greece is facing. It could run out of money this month without some form of continued assistance that's both palatable to the new administration, and compatible with the expressed wish of the nation's voters. Otherwise, the first country to exit the euro may not be the last.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net