Friday, July 17, 2015

The Deal That No One Likes

Greek Prime Minister Alexis Tsipras and German Finance Minister Wolfgang Schauble are now in agreement.  They both think the recent "deal" is a bad one. Said Schauble yesterday, "Perhaps it [a temporary Euro exit] would be the better path for Greece."  On Wednesday, Tsipras described the deal to the Greek Parliament "as a difficult and bad agreement."

A Wall Street Journal story today by Stephen Fidler reported "that the likelihood that the prospective three-year deal will fail -- possibly even before it starts, let alone is completed -- is now estimated at higher than 50% by some senior officials in Europe."

Meanwhile, the IMF, Jack Lew, Greece, and Francois Hollande are all arguing that Greek debt needs a major haircut in order to be "sustainable."  Interesting.

Suppose you give Greek debt a 25 percent haircut.  That would approximately offset the $ 82 billion new money provided in the deal.  So you give Greece $ 82 billion and then reduce their debt by a similar amount.  Net, net.  You just gave Greece $ 82 billion that they are, from day one, not obligated to pay back.

Maybe that's the plan.  Give Greece $ 82 billion, without requiring repayment, every three years. Of course, that number would rise over time.  Perhaps this is the beginning of a plan to make Greece a vassal state -- a state that becomes a permanent welfare recipient.  What remains of any incentive for Greece to reform?

The right answer has been there all along.  Let Greece default and stay in the Eurzone.  This simple solution is the only solution that has any hope of: 1) limiting Germany's exposure; 2) improving the Greek economy; 3) providing Greece with incentives to enact economic reforms on its own.

Instead, a deal that no one likes and few think will survive has been the answer by the politicians.

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