Today everyone has chimed in to opine on what was, without doubt, the most historic weekend in European history: one in which we saw the Eurozone's true face when, despite not have a legal right to do so, Germany almost unilaterally expelled "temporarily" one of its core members. Now, it's David Einhorn's turn.
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Last year, it appeared that Greece had finally turned the corner
after years of suffering through imposed austerity and the resultant 25%
collapse in GDP. Much like the Seahawks’ ill-fated decision to pass the
ball at the end of Superbowl XLIX, instead of giving it to monster
running back Marshawn Lynch, Greece snatched defeat from the jaws of
victory by electing the populist anti-austerity, pro-debt-writedown,
Syriza coalition.
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Puerto Rico’s governor recently said of its own debt, “This is not
about politics; it’s about math.” The math for Greece is easy: austerity
hasn’t improved the economy and its debts are unsustainable. Knowing
this, Syriza no longer wanted to play the “extend and pretend” game.
Further, Greece’s recently resigned finance minister Yanis Varoufakis
believed they wouldn’t have to. Mr. Varoufakis, who kept reminding
everyone that he is a professor of game theory, believed that the
European leaders would prefer to make concessions now rather than manage
the disruption of a Greek default. He must not be familiar with the Tyler Durden school of negotiation: the first rule of using game theory is you do not talk about using game theory. What’s more obvious is that Syriza didn’t understand what the game is.
This is not about math; it’s about politics. Consider that the main difference between Greece and France is that France is a big fan of extend and pretend. And
as long as France says it will pay, its bonds might yield just a bit
more than Germany’s. Though Greece has a superficially unmanageable
ratio of debt to GDP, the debt had been restructured so that there is
little debt service burden for the next several years. Politically,
European leaders prefer to leave the future problems in the future.
Syriza’s refusal to play along is a problem not just for bondholders but
also for those holding seats of power. The European leaders
fear that if Syriza can claim even a moral victory, it will inspire
other European countries to oust their current leaders in favor of
populist governments who campaign on the promise of debt repudiation.
Though Mario Draghi promised he would do whatever it takes to save the euro, that doesn’t include lifting a finger to assist Greece financially or in any way signal that the ECB has Greece’s back.
Just days prior to the January elections, Mr. Draghi announced that the
ECB would exclude Greece from quantitative easing for at least six
months. Doing whatever it takes is proving to be a conditional
promise, as denying Greece access to the capital markets is a key tenet
of the European strategy to pressure Syriza.
For anyone still missing the joke, Bank of Japan Governor Haruhiko
Kuroda summarized the view of the global central planners when he said, "
trust that many of you are familiar with the story of Peter Pan, in
which it says, ‘the moment you doubt whether you can fly, you cease
forever to be able to do it.’ Yes, what we need is a positive attitude
and conviction.” Perception supplants reality. The moment leaders (or markets) start making it about the math, gravity comes into play.
The result is that Europe is unwilling to allow Syriza a face-saving
compromise, even if that means Greece collapses and the rest of Europe
suffers. At this writing, Syriza has capitulated by proposing a deal
which leaves Greece with even more austerity than when negotiations
began and no actual debt forgiveness. This might not be enough,
as the grand goal of the European negotiators appears to be to
discourage other countries from electing populists.
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