Column: Grexodus is imminent

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Published: April 20, 2015 12:19:39 AM

There is no other way for Greece to get its hands on the money to pay its current expenses

Apparently, ‘exit’ is Latin and looks like someone being forcibly excluded. ‘Exodus’ is a Greek word and has a positive image from the Biblical precedent. So, ‘Grexodus’ it will be when it happens. The time is likely to be soon. Last weekend, the movements in this drama were being played out on the fringes of the IMF meetings in Washington, D.C. At a couple of successive press conferences held at the Brookings Institute, Wolfgang Schauble on the German side, and Yanis Varoufakis on the Greek side, made the yawning chasm between the two positions clear.
Greece has to pay 747 million euros by May 12. It also has to convince the rest of Eurozone about its fitness to be in the euro by presenting a reform plan. This has to be done by the end of July to unlock some bailout funds. As of now, it looks like Greece may just find the money by May deadline. What is then the problem? It is that it has limited funds to pay salaries and normal expenses of government. This means that even if it could fashion a credible reform plan (which is doubtful), it may literally run out of money before the end of July.

Greece has been downgraded by Standard and Poor’s to junk-bond status. The ECB has forbidden Greek banks from lending any more to the Greek government. Money is leaving Greece, raising the distress of Greek banks who are on a short leash from the ECB.

Greece would like some slack, some Plan B so that it does not have to pay its debt back on the tight schedule. Had the creditors been private holders, there could have been a sort of Argentinian-style settlement. But the haircut has already been given to private creditors. Now, the big creditors are individual EU governments or the IMF. They are forbidden legally from forgiving debt. Christine Lagarde made it clear that the Fund had never granted debt forgiveness or even delay in payment to any country. The Fund, certainly, would not make that concession to Greece which is, when all is said and done, a developed economy.

The Eurozone countries do not look like condoning Greece. They take the view that since Greece borrowed the money, it should pay it back. The other countries which were in trouble have tackled their difficulties. Ireland was the first to recover. Its debt had been incurred by private banks, not by the government overspending. Spain has recovered and resumed growth. Even Portugal is out of Emergency.

The weaker countries have no sympathy for Greece’s troubles. Germany is strongly against any concession. The Eurozone idea is that Greece needs deep institutional reforms. Its richer citizens have to acquire habits of tax-paying. Its public sector employees who have been rewarded with early retirement, generous pensions despite their inefficiency (sounds familiar?) have to be told some home truths about what is affordable. Greece needs to prepare itself through a drastic cutting of costs to become competitive. The Eurozone believes if Greece can do all this, it can resume growth. That will make it easier to repay the debt.

It sounds good but not plausible given the institutional sclerosis in Greece. Over the decades, the rich elite in Greece has played away. The public sector is bloated and inefficient. In the past, Greece has defaulted several times. If it were to stay in the Eurozone, there will be thirty years of austerity. Greece should not have been admitted into the Eurozone in the first place, but at that time, politics prevailed and everyone wore blinkers about the qualifications Greece had.

It is much more likely that Greece will default on its debt. It may also need to leave the Eurozone. There is no other way of getting its hands on the money to pay its current expenses. If it were to leave the euro, it could print its own currency—call it the New Drachma. The currency will immediately depreciate but the government will be able to print as much as it likes. The costs of public and private inefficiency will be borne via inflation rather than austerity. Harsh though this may sound, money illusion will soften the pain. Prepare for Grexodus.

Iceland had a similar experience recently. Its debt was incurred by its private banks which then went bust. Iceland had a referendum in which its citizens decided not to repay the debt. Iceland was barred from borrowing on the international markets. But after a few years, it is back and growing healthily.

Greece is in a much worse state than Iceland. But it will try a referendum in which citizens will be consulted on staying in or going out of the Eurozone. I expect the decision will be to ‘go out’. This is because five or even ten years of intense pain is better than thirty or forty years of constant austerity.

The author is a prominent economist and Labour peer

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