Sunday, January 4, 2015

The Cost of a Grexit

We live through amazing times! Not too long ago, the mere mentioning of the word 'Grexit' was considered anti-European or irresponsible. Today, however, there is hardly an article about Greece which DOES NOT mention the word. The German government which made history by declaring that a bail-out of Greece was 'without alternative' is now - according to DER SPIEGEL - expressing the view that a Grexit wouldn't be a big problem.

On the political side, George Papandreou, who made history by personally guaranteeing that all of Greece's debt would be paid but who never lived up to this personal guarantee, is returning with a new party. He has learned from Alexis Tsipras that positive soundbites are important. It's no longer "There is money!". Instead, he is now onto "Let's go!", "We'll write history!". Papandreou is now talking about values. He is calling for solidarity. He is choosing beautiful words like "wanting to express politically a social alliance between Justice and creativity, emphasizing that the 'post-dictatorshiop era ends in Greece and now the new struggle is to free democracy that has been imprisoned by economic and media interests that are supported by the clientist state'". And, for that, pundits predict that he will get up to 5% of the vote!

Everyone agrees that a Grexit would impoverish Greece in the short-term and only few voices warn that a Grexit might not be smooth sailing for the Eurozone. But no one seems to remind the Northern champions of a Grexit that a Grexit would entail great costs for Northern tax payers as well.

Early on in the bail-out game, EU politicians warned their tax payers that not bailing out Greece would entail enormous direct and indirect costs for their economies. Is anybody making such estimates now? If so, why are they not informing the public about it?

DER SPIEGEL reports that the maximum damage to Germany of a Grexit would be 70 BEUR. Since that would only be the starting point for negotiations, the actual damage would be much lower. I presume this is assuming that Germany's damage is limited to its share of the bail-out financing; no more.

But even if the actual damage to Germany were 'only' 50 BEUR, that amount could not be hidden like much of the bail-out financing has been hidden from the budget so far. Instead, that amount would sooner or later have to flow through the budget and, at that point, German tax payers would awaken to the fact that a Grexit was not free of charge to them.

Only a few months before the Lehman bankruptcy, it was considered inconceivable that Lehman would be allowed to fail. For the simple reason that the cost would be prohibitively high. As Lehman's demise progressed, talk about their possible bankruptcy intensified. At first, that talk was a warning that bankruptcy should be avoided at all cost. At some point, the 'crying wolf' lost force. I still remember the week before Lehman's bankruptcy: everyone had basically agreed that a bankruptcy could not be avoided and that was that. No one 'cried wolf' any longer.

And then the wolf showed up...

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