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All Hail the Greek Exit

Politics / Eurozone Debt Crisis May 24, 2012 - 12:30 PM GMT

By: Ashvin_Pandurangi


Best Financial Markets Analysis ArticleThe dialogue between academics, officials, analysts and pundits in Europe has very obviously turned towards ways of spinning a Greek exit as a "good thing" for the system, or, at least, not such a "bad thing". Last week, we saw analysts at Bank of America and HSBC telling us that a Greek exit would actually cause a large market rally for a bunch of dubious reasons (i.e. the CBs will print to infinity and cause everything to soar, while also making a stark example out of Greece). That's a common argument, and there is at least some historical precedent in support. Like I said before, though, we can no longer use recent history alone as a reliable guide to the near future.

Deterrence is Dead

When the Greek people finally exit the EZ, and if/when they are made to SUFFER at the Cross for their "sins", the Spaniards, Italians, Portuguese and Irish (and eventually, the French, British, Germans, Americans) will look on and realize that the Cross is not such a bad fate when compared to the tons of flesh that will be demanded by the globalist elites in perpetuity.


In the short-term, it is quite possible that the bankster propaganda-and-punishment cycle succeeds in quelling further internal dissent within the Eurozone, but any such success will amount to nothing more than castles made of sand on the shores of a ravaging sea. As the tides of popular resistance continue to turn and grow with force, these castles will eventually crumble.

But now we have entered the stage of the crisis in which people are rushing to claim that the deeply-rooted structural issues facing countries in the EMU can be fundamentally resolved, despite or because of a Greek exit! These claims come from both sides of the divide, too. First, we have an article on BBC by Ann Pettifor, who falls into the "liberal progressive" camp - one that bears a certain fondness for Keynes. To be fair, people like Pettifor have been making the case for a Greek default/exit for quite some time now.

Nevertheless, I'm sure she is fully aware of the fact that, if there was ever a time to make the case for an exit, it is now.

Greece: The upside of default


It now seems inevitable that Greece will default on its debts, with all sorts of disastrous scenarios being discussed, particularly if it has to leave the euro.


But I know from my experience of working with Jubilee 2000 to "drop the debt" of poor countries in Africa and Latin America that there is life and economic recovery after sovereign debt crises.


Countries that defaulted in the 1990s suffered recessions that lasted briefly. Then came the rebound, as Arvind Subramanian of the Petersen Institute shows. Argentina grew by 8% after its default, Russia by more than 7%, and Indonesia by 5% after its crisis.


Of course Greece would initially suffer a severe shock and economic contraction. Its elites would intensify the export of their wealth to, for example, the City of London, causing inflation.


Greece would have to issue an alternative, parallel currency - at a large discount to the euro - to finance domestic economic activity.


But Greek exporters would benefit from a mega-devaluation of this new currency, and increased competitiveness vis-a-vis European partners, especially Germany.


There are other upsides for Greece too. To understand why, we need to recognise that the eurozone monetary framework is like a "golden corset". By defaulting on its debts, Greece can escape the "corset" that resembles the "barbaric relic" that Keynes deemed the Gold Standard of the 1930s.

I think you get the picture - it is pretty clear where Pettifor's analysis is headed from there (if not, follow the link). There is a good deal of truth to what she says, but it is also contains an obvious spin of optimism about what Greece can accomplish on its own. Next, we have an article in Bloomberg explaining the position of the Bundesbank (Germany's CB), which falls into the conservative, "fiscally disciplined" camp that has a fondness for Austrian economics. That is obviously the diametric opposite of what Pettifor believes, but they are both attempting to spin the Greek exit as a "manageable" affair.

Bundesbank Suggests Greek Exit From Euro Would Be Manageable


Germany's Bundesbank said the consequences of Greece reneging on the terms of its bailout program would be manageable for the euro area.


"The current situation in Greece is extremely worrying," the Frankfurt-based central bank said in its monthly report today. "Greece is threatening not to implement the reform and consolidation measures it agreed to in return for sizeable rescue programs."


Speculation about a Greek exit from the euro region has increased before new elections next month that could give power to parties opposed to austerity measures.


Greece is "jeopardizing the continuation of aid payments," the Bundesbank said. "Greece would have to bear the consequences of such a decision. The challenges for the euro area and Germany would be significant but manageable with the help of cautious crisis management."


The ECB, in an effort to protect its balance sheet, last week excluded some Greek banks from regular refinancing operations, moving them to an emergency-liquidity program run by the Greek central bank until they are sufficiently recapitalized.


"In supplying extensive liquidity to Greece, the Eurosystem believed in the implementation of the programs, and has thus taken on considerable risks," the Bundesbank said. "In light of the current situation, it shouldn't increase these significantly any more."

Please understand that I would be the last person to suggest that Greece defaulting on its external debts and implementing its own national currency will mark the "end of the world", because it most certainly won't, and those are really their best options now (they would have been much better options a few years ago - or better yet, before Greece entered the euro). However, a Greek exit is not going to be anything close to a walk in the park, and will be a lot more painful than the analysts above would have you believe. It will be very painful for both the Greek people, and the Eurozone in general.

What Pettifor and the Bundesbank fail to mention is that investors are like herd animals, and these animals have no time for Keynesian or Austrian ideology. The possibility of a Greek exit is weighing heavily on the markets as I write this today, as well as for the past few weeks, but have we really seen the full extent of panic that can result when it actually happens? That sort of panic is not something the Eurozone authorities can manage, no matter how badly they want us to believe that they can. Similarly, it will not be a path to favorable inflation, exporting glory and sustainable economic growth for Greece, as Pettifor argues.

So the liberal idelogues want to spin the crisis and prove to us why they were always so right, and the conservative policymakers want to spin the crisis and explain to us why it doesn't really hurt to be so wrong. They all want to pretend that the world is governed by a much simpler equation than it really is. What should be abundantly clear by now is that we are sailing in uncharted territory here, and the seas are getting angry. Everyone has an agenda or an ideology to push, and fanciful ideas about what the world will look like a few years from now, but no one really has a clue what will happen tomorrow or the day after.

Ashvin Pandurangi, third year law student at George Mason University
Website: (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Ashvin Pandurangi to - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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