15 May 2012

Hollande and Merkel dance around the Greece lightning

An election rerun in Greece, and lightning striking Francois Hollande’s plane. The omens are not great. The IMF’s Christine Lagarde today suggests some preparations are under way to cope with so-called Grexit, which “could get messy”. A less circulated but remarkable quote came to our ITN team in Athens from Makis Voridis, Greece’s outgoing Transport minister, from the centre right ND party.

He told us: “There is a possibility that at some point, some part of the fiscal aid given to Greece will stop. Then it will almost be a necessity to return to the drachma in order to be able to pay. So no one will force us out. But probably the Greek government then, if there is one, will have to go back to the drachma… That is the danger.” He goes on to point out that such printed drachmas might also be needed to recapitalise banks.

An important quote, because it sheds light on the confusing world of what Grexit actually is. Firstly it is a process rather than an event. Secondly it is about monetary structures more than actual cash. As Mr Voridis points out, not even a hard left Syriza led government would unilaterally leave the euro. Instead, they would renege on the bailout conditions, and at that point their fiscal aid would get pulled, and it would then have to print new currency, either euro IOUs, or Greek euros, but basically drachmas.

The other question concerns whether Greek banks would still get liquidity support from the European Central Bank. Many believe that the ECB would have to offer transitional support to prevent chaos. In recent days some ECB figures have started to emphasise that liquidity support cannot be given to insolvent banks. This could define the difference between orderly and disorderly euro exit.

In my film from Athens about how Greece is rebelling against the “internal devaluation” strategy agreed in the Troika-Greece memorandum, you will see why trial is becoming more popular. As I said last week, Syriza wants to use the threat of disorderly euro exit as a bargaining chip in a negotiation over the bailout T&Cs. It thinks Germany is bluffing, hasn’t built a high enough firewall, and when push comes to shove, will pay a higher price to keep Greece in. Germany and Brussels think the Greek people are bluffing, and when push comes to shove, will do what it takes to stay in the Eurozone. Watch the report here:

Into this cosmic game of chicken comes Francois Hollande, “I appreciate the sufferings of the Greek people”, and a strong showing for German opposition (more anti-austerity) and amazingly Merkel’s Bavarian coalition partner leader Seehofer, all suggesting growth not austerity. I could not read the Hollande Merkel press conference clearly. “HoMer” rhetoric on Greece was softer than “Merkozy”. But they also appeared to suggest to the Greek people to “vote for the euro” in the elections. It boils down to this: will Hollande-Merkel allow Greece softer austerity, and still pay €31bn tranche of the bailout at the end of June? I don’t know the answer to that.

Clever people in other European capitals believe that it would be a “big big gamble” for Merkel to allow Grexit, and the mess would basically require an immediate move to €bonds. So perhaps Alexis Tsipras and his gambit on Germany folding is right. If he plays this move, and wins the election, he can only do so by risking Greece’s euro membership.

Forget the lightning, the storm has just started.

See my explainer of why the election might lead to Grexit here: