A Greek Exit Could Create Chaos

Greece and its creditors continue to negotiate in the hoped to unlock the next aid payout. As time runs out and Greece’s threatening tactics backfire, the risk of an accidental Greek EMU exit is rising. Greece as well as the rest of the Eurozone may be better off if Greece did leave the currency union, but if it happens, the risk and the fallout for both sides would be much greater.

The Eurozone’s Greek nightmare drags on and with it the risk of a Greccident, an accidental, unplanned Greek exit from the monetary union if and when money finally runs out and the first repayment is missed.

In practical terms for Greek coffers this is not much different than an official write off, in accounting terms, however, it makes a big difference. The problem is that the lion share is held by the EFSF the European Financial Stability Facility, which is backed by guarantees from Eurozone countries. The potential liabilities these guarantees entail do not show up in official debt measures, and the fund doesn’t have to worry about the sharp decline in market rates of Greek debt, as it intends to hold the paper to maturity. This would all change, if the EFSF would have to write off the Greek bond it holds and then has to call on Eurozone governments to honor their guarantees.

A debt extension would amount to much of the same thing, which is why this debate is pretty much a red herring. The real issue is the state of the Greek economy. Interestingly, Greece now accuses its creditors of irresponsible lending, and indeed, considering that ahead of the much hated austerity measures, Greece hadn’t managed a primary budget surplus since the early 1970s one has to agree that extending loans to Greece was like ignoring the fact that a company is not temporarily illiquid, but fundamentally unprofitable.

The chronic problems with tax collection and tax exemptions is another issue that needs to be addressed and interestingly, even though the current government came in on a predominantly left platform it seems it still doesn’t want to finally tax Greece’s super rich shipping company owners, or take up Switzerland on its offer to track down those that transferred large sums to Swiss bank accounts.

If creditors would extend further funds to Greece without conditions, without the chance that structural problems are being addressed, it would indeed amount to irresponsible lending and only prolong the inevitable bankruptcy as the government realizes that it cannot stick to its election promises and manage without foreign help, even if it defaults on its debt schedule.

As has been very aptly pointed out you cannot vote yourself rich and tax-payers elsewhere are not only getting tired of bailout out Greece, but also of the threats and demands Greece issues as it hopes for funds. At this pace, the risk of a Greccident is becoming more and more real.

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