Why A Grexit Would Make Lehman Look Like Childs Play

22:27 2/6/2012 - Πηγή: Olympia

Maybe I’m wrong, but every time I look at the possibility of a Greek exit right now I see it spiraling out of control and dragging down the entire global economy. I hear and read the arguments of why it is controllable and they just don’t seem credible. They either link a Greek devaluation to other devaluations that have little,

if anything in common. They also seem to ignore human nature and how the markets will likely respond. I think with planning and time, a Greek exit would be manageable but right now it would create chaos, first within Europe and then the globe.

The ECB, EFSF and IMF will take massive losses

The ECB has €50 billion of GGB bonds still on their books. Those would not get paid at par by Greece if this is an amicable breakup, but this is quickly heading to a pots and pans thrown in the kitchen sort of break-up. Why would Greece pay the ECB if they feel like the ECB drove them out? Don’t forget, not for a second, that most of the money Greece now gets goes to pay back the ECB and IMF. The EFSF is totally out of luck. The ECB might be able to offer something to a post drachma Greece, but the EFSF offers nothing. The IMF has more negotiating power, as their direct loans had more protection in the first place and they are likely to provide additional funds post exit, but quite simply Greece won’t be able to pay them in full on existing loans.

With the ECB, EFSF, and IMF all taking big losses, their credibility is hurt. Worse than that, they have exposure to Portugal, Ireland, Spain and Italy and the markets (if not the politicians) will become very concerned about those exposures. The IMF may see its alleged firewall crumble before it is ever launched. The ECB, integral to any plan to protect Europe will have lost credibility and many will question their solvency. The EFSF will be hung out to dry and immediately the market will attach all their risk to Germany and France, not making people in those countries particularly happy.

Preparation: The ECB in particular is acting like a profit center. Does it really need the current coupon it gets on its SMP portfolio? Does it need to be paid back at original scheduled maturity date? Paid back at par rather than cost? The ECB should work proactively with those countries to exchange their bonds for something that doesn’t cause a loss for the ECB but gives the countries a big benefit (maturity extension, rebate of bonds purchased at discount, and much lower coupon). Whatever message the ECB is trying to send by not doing this seems bizarre to begin with, but insane once you consider the real losses they will take upon a Grexit. The IMF and EFSF have less flexibility but can cut rates on their loans, as they too don’t need to generate a profit either. This takes pressure off all of the countries, has no real “cost” to any country, and sets a good tone for proper negotiations of what will happen upon a Grexit down the road.