Saturday, June 27, 2015

Greece & The Euro: Super Mario will come to the rescue this weekend

Mario Draghi of the European Central Bank
Deadlock reached, the EU negotiators broke off talks with the insurgent left wing Greek government, and that government threw a Hail Mary pass by calling for a referendum on the austerity package on July 5. Meanwhile, a hefty repayment of debt is due on June 30, and commentators are talking about a Greek default, leading to a Grexit from the EU.

Interesting events, but a man who embodies all the virtues that Plato imbued his Philosopher Kings with is now entering the stage right.

That man will avert the crisis and let negotiations continue.

Nicknamed by some Super Mario, Mario Draghi is the head of the second most powerful central bank in the world, the European Central Bank. With an impeccable record as banker, financial diplomat, regulator, small-p politician, Draghi is one of the most formidable persons currently operating in world economics. Born in Italy, trained in a Jesuit school, educated in Ivy League schools in the USA, he has had a remarkable record as a fixer: the go-to man if you have a problem worthy of Hercules.

A member of the Group of Thirty, Draghi is that rare combination of thinker and man of action. He is well know now for his famous defence of the Euro:

In July 2012, in the midst of renewed fears about sovereigns in the Eurozone, Draghi stated in a panel discussion that the ECB " ready to do whatever it takes to preserve the Euro. And believe me, it will be enough." This statement led to a steady decline in bond yields (borrowing costs) for Eurozone countries, in particular Spain, Italy and France. In light of slow political progress on solving the Eurozone crisis, Draghi's statement has been seen as a key turning point in the fortunes of the Eurozone.

Ready to do whatever it takes.  Words now as famous amongst financiers around the world as Dirty Harry’s Make my day are to Americans.

This weekend Draghi’s ECB meets to discuss Greece and its banks, and he will be speaking to the Greek government leaders.
The chances of Draghi averting this latest crisis are over 80%, in my view. Not only is he a man who thinks outside the nine dots, but he is a fearless defender of the worth of the Euro, who knows full well how much political capital has been invested by so many for so long in the concept of the Euro.
The Super Mario Rabbit

Add to that several more pieces of the Greek debt puzzle, and you can see why a solution will be drawn from Super Mario’s hat, like a rabbit, to the amazement of the chattering classes.

Puzzle piece number one is that most of Greek debt is now owed to EU sovereign or international bodies, with only a small amount owed to private creditors. Also, those public lenders have done what lenders often do when faced with a sticky problem borrower: kick the can down the road, by lending money to service past debt owed to the lenders. Greece right now is going through a revolving door debt scenario: it cannot repay the huge amount of debt it raised during past exuberance, and its public lenders are giving it new funds to pay its interest and principal repayments, so as to prevent any defaults causing embarrassment.

Non-payment of the June 30 tranche will not be default but simply a payment in arrears, and so will not trigger cross-defaults or other penalties for Greece. That means there is time for Super Mario to work his magic.

Expect Draghi to cover shortages this weekend; then some cosmetic changes to the package the EU Troika lenders have tabled so far, which would allow the Greek government to recommend acceptance of the “revised” package in the July 5 referendum. 

That referendum will vote Yes to the revised package, giving the Greek government cover to implement the reforms in the package.

So in around two weeks’ time the EU and Greece can start talking yet again about how to make a huge chunk of the unpayable debt disappear using sleight of hand solutions, and Greece can start considering how to pull itself out of the depression it is now in.

The Eurozone will be preserved; Greece will stay in it, and in the EU, and the dance will continue.

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