Grexit Or No Grexit?

"Athens’ biggest worry was the sheer recklessness of its own democratic government."
– Thucydides, 5th century BC. History repeats.

Greece rocks the news this morning with word that today’s planned summit has been cancelled as thorny negotiations continue:

From the BBC:

A summit of all European Union members planned for Sunday has been cancelled as "very difficult" talks over a third bailout deal for Greece continue.

Eurozone finance ministers resumed talks that began on Saturday afternoon….

Without a deal, it is feared Greece could crash out of the euro.

Read entire article here.

Bloomberg reports:

European finance chiefs said they were unlikely to strike a deal on the outlines of a third Greek bailout, threatening to delay the cash infusion Prime Minister Alexis Tsipras desperately needs.

Read entire article here.

In the words of Slovak finance Minister Peter Kazimir:

It's not possible to reach a deal today. The breach of trust is so big.

Meanwhile, Bloomberg has this update:

Greek Prime Minister Alexis Tsipras called for an “honest compromise” to stay in the euro as his creditors questioned whether he’ll make good on his promises.

To read the entire article, go to http://bloom.bg/1JcjtAR.

Dear Readers. Within our firm we have diverse opinions about policy outcomes involving Greece. Below is my personal view.

As a professional money manager, I like QE and more and more bailout credit extensions. They make markets rise. They make wealthy clients wealthier. So they’re good for my business.

But as a world citizen I have a different view. I see monetary policy trying to cure political ills by applying a salve that cannot heal this festering sore of poor or failed governance. Greece is just one more chapter, being written in real time.

Anyway. Here is my view on Grexit.

My conversations this week lead me to favor Grexit. And history shows Greece could then run a currency board. Or other forms and not be in the moral-hazard gunsights of Northern Europe. In his piece “Grexit: Montenegro, Ecuador or Bulgaria?” Steve Hanke suggests a constructive approach for Greece:

In the event of a Grexit, Greece’s best option to establish sound money and fiscal discipline would be to emulate their Balkan neighbors to the North, and install a currency board that issues drachmas that clone the euro. Greece would remain in a unified currency area with the euro, without the moral hazard problems associated with formal membership in the eurozone.

Greece runs on corruption and a cash economy. So growth would occur like it has elsewhere in other cases.

If Grexit is indeed the best outcome, sooner rather than later may be good. Eighty billion in three-year new-money debt for Greece is a bad deal for lenders, and they know it. If they do it, what’s to keep Portugal from saying, we want what Greece got.

My view is that Grexit is better for Greece and better for the rest of the European monetary union (EMU) that would remain. The concept of a temporary exit is gaining some support. Bloomberg reports, “The idea of a temporary Greek exit from the euro, reprised Saturday by Germany’s Finance Ministry, won qualified support from Chancellor Angela Merkel’s deputy, signaling broader acceptance for such a step within her government.” To read the entire article, go to http://bloom.bg/1HnfUHM.

German discipline is outvoted by French and Italian socialism. Those three countries decide this. The real risk is that they do not agree among themselves. Will the 19-nation Eurozone agree to “restructure” Greece’s debt (read: extend and pretend), or will German finance minister Schäuble’s proposal for a “temporary Grexit” prevail? We won’t know for several more days, but meanwhile in Greece:

[The] banks have been shut for two weeks, and cash withdrawals are capped. The vital tourism industry is suffering. People are spending less, some public services have stopped charging, and the healthcare system is running out of imported medicines.

Greece needs to pay pensions and wages this week, and make a big debt repayment to the European Central Bank next week. Without an injection of funds fast, it may have to issue IOUs, a first step to printing its own currency. (CNN)

For markets, resolution is bullish regardless of outcome in my view. Uncertainty is usually the worst force. Good news or bad news can be resolved and price discovery then occurs. We remain positioned for rising markets once the present Greek chapter concludes.

For policy makers the issue is different. As Thucydides warned 2500 years ago, political regimes make fatal errors whether then in the Peloponnesian wars or today. Politics and democracies have inter temporal flaws. Election cycles are short and impacts of decisions show up after the politician is out of office.

We watch Greece but think more broadly about most governments and most monetary systems including our own here in the U.S. Sad to say but long term sanguinity is elusive. Thucydides recitation of history and its lesson applies today.