Greece: Costing the exit

  • 16 February 2012
  • From the section Business
  • comments

Greece isn't "ready" to default, or leave the eurozone. I suspect it never will be.

Even if politicians - and economists - can see the long-term case, the internal turmoil that would come first is hard for anyone willingly to sign up to.

But, you can't help thinking, the eurogroup negotiating the Greek deal is getting readier for a Greek exit by the day.

On balance, a majority of the European officials on Wednesday's conference call probably want Greece to stagger on.

For them, the "no crisis tomorrow" imperative still holds, as it usually does. Given the choice, policy makers nearly always want to buy more time.

But, as Evan Davis and I discussed on the Today programme today (see right), the hardline rhetoric we have been hearing this week is surely a reflection of the fact that the perceived costs of a Greek disaster are not as high as they were in 2010.

In fact, they are a fair bit lower than they were at the start of this year.

Here's why.

First, thanks to the ECB, there's a lot more money sloshing around the European financial system than there was a few months ago. Put simply, the balance sheets of some Spanish and Italian banks no longer look like one more push would send them over the edge.

Second, investors are increasingly seeing Greece as a special case. You can debate how far the Greek domino is now from Portugal or Cyprus (more on that later). But if you look at the bond market, or the cost of insuring against sovereign defaults, the gap with Spain and Italy is much larger than it was.

Third, everyone - including the private sector - has now had plenty of time to prepare for this and make their contingency plans. The banks have also had time to slash their exposure to Greek assets.

The combined exposure of foreign banks to Greek entities - public and private - is now around 80bn euros. In 2009 they were in for well over 200bn euros.

And remember, a good chunk of the Greek assets that are still on their balance sheets has already been marked down.

Which brings me to the last reason why a Greek exit looks less terrifying than it did, which is that the prospect of keeping Greece on track is looking a lot worse, especially if you're one of the Northern European politicians who always thought the money was heading down a black hole.

As Willem Buiter pointed out recently, these officials and politicians worry deeply about the message that is being sent to other members of the club - if a country can repeatedly miss its targets and yet still qualify for support.

For them, pulling the plug on Greece would send a powerful message.

Or at least, that's what one side of their brain is telling them. The other side is saying "don't forget Lehmans".

In October 2008, officials at the US Treasury and the New York Federal Reserve also thought that the private sector was prepared for Lehmans to go bust (after all, they'd had six months to think about it, since the authorities managed the collapse of Bear Stearns).

Back then, the US Treasury Secretary, Hank Paulson, was also very worried about moral hazard, and the need to send a message that failing institutions would not always be bailed out.

There are plenty of differences between 2008 and now. But when it comes to contagion and Greece there's still a lot that policy makers cannot know for sure.

They cannot know for sure that the financial markets will take Greece as a "one-off". Even if Italy and Spain can be kept out of it, officials have still to work out what to do about Portugal - and Cyprus.

They also can't be sure that the tools they have for protecting Italian or Spanish banks from any fallout will be strong enough - and credible enough - to persuade ordinary depositors that their money is safe.

Put it another way: when it comes to Greece, European policy makers would still rather not have a crisis tomorrow.

The worse the rhetoric gets, the more I wonder how long they will be in a position to choose.