Waiting for the whistle: Is it time to call the game over for Greece?

With banks taking billion euro hits on Greek debt, isn’t it about time the eurozone realises that the game is up and it is now time for Greece to leave?

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Swap the flag for a white one; the game is up
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Simon Miller
On 24 February 2012 13:25

A tranche of bank results this week have put into sharp focus the effect the eurozone crisis is having on bank balances. Four of the region’s largest banks have reported that they lost more than €8bn last year from their Greek bond holdings.

In the UK, RBS took a 79 percent loss – £1.1bn – over its exposure while France’s Credit Agricole saw a €1.3bn hit on its debt holdings. In Germany, Commerzbank lost €2bn in its holdings and in Belgium, the already-troubled bank Dexia saw it book a €3.4bn loss in 2011.

And it is not over yet.

Today sees private debt holders be presented with the debt swap deal that was nodded through the Greek parliament yesterday.

The deal will see them take, in essence a 75 percent haircut in their holdings in a deal what Commerzbank bank’s chief executive martin Blessing described as being as voluntary as “a confession at a Spanish inquisition trial”.

Now, while nobody expects the Spanish Inquisition, this scenario has been depressingly clear for a long time now. Despite the International Swaps and Derivatives Association claim that a Collective Action Clause on private debt holders did not constitute a default, by forcing private debt holders to take these cuts in what is owed to them, Greece will essentially default; no amount of squirming around the semantics will have the markets see it any other way.

The fundamental problem is that Greece needs to reduce the amount of debt it owes and will do so by, er, borrowing money.

Can someone explain this logic to me? At what point when the advert came up for Greece to consolidate its debt into one, easy monthly payment plan, did no-one point out the cost to the country?

When the debt becomes so great that you have to borrow money just to service the interest rate, you really have to pack your bags and leave the party. Even by essentially defaulting and paying bankers’ interest, the debt problem is still there for Greece.

As I wrote on Tuesday, even the Troika thinks it won’t work.

And there is still the German problem. Faced with great political pressure at home, Merkel’s government has introduced a bill blocking the boosting of Europe’s firewall. With a potential exposure of over €300bn if a boost happened, Germany would be in a Constitutional bind which would be costly for Merkel. She still needs to get the bailout agreement through the Bundestag on Monday and this blocking bill is designed to give succor to an ever-growing sceptical German audience that is fed up with picking up the tag.

The problem is that the other players – the UK, US, the International Monetary Fund – are insisting that the eurozone pays more and plays ball before more cash is piled into Greece.

Furthermore, any support for Italy or Portugal would also be put at risk if the single currency countries don’t pony up.

Once the debt problem became so great that Greece had to borrow money to pay the interest of its debt, a haircut was the only possible solution in light of the failure to introduce a true fiscal union across the eurozone.

And do you know what the depressing thing about this is? We’ve sort of been here before. This is from the IMF’s own report into the lessons learnt from the Argentinean default: “In hindsight, the most viable option would appear to have been an early debt restructuring involving a significant present value reduction, combined with the abandonment of the currency board.”

Substitute currency board for the euro and you have what many of us have been calling for, for months, if not a couple of years, for the troubled Greeks.

The IMF would claim that Argentina is different to Greece, being a heavily commoditised country, but if Greece devalued and went back to the Drachma, how much inward investment would flood in on the tourist ticket alone? It is like watching your team get relegated. You know it is going to happen but you always have in the back of your mind that results will go your team’s way, right up to the final whistle of the final match of the season.

As the IMF noted about Argentina: “However, the authorities were unwilling even to consider the possibility of an exit: neither the government nor the public were prepared to take such a drastic course until it was forced upon them by events.”

Despite the warnings of history and despite the growing sense of endgame from Greek citizens and market leaders, eurozone leaders still seem to be waiting for that final whistle – even then I wonder whether they will realise that the game is over?

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71

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