It may be negotiation-driven brinkmanship but the rhetoric from Brussels, Berlin and Athens suggests that unless Greece is prepared to push even further down the austerity rabbit hole the Drachma may be coming back.
This chart from Quartz, using data from the Bank of Greece, shows the acceleration in bank withdrawals in recent months. Many financial commentators are urging European leaders to let Greece go and those few remaining Greeks with spare cash are acting as if this is more likely than not. Greece has endured a five-year long and recently accelerating slow motion bank run.
You can understand European leaders’ thinking. With a population of just 11 million accounting for 1.5% of EU GDP, Greece is a tiny economy getting smaller all the time. Europe doesn’t need Greece so why not let it go?
We’ve been here before, sort of. In September 2008 US regulators were contemplating the fate of Lehman Brothers. A small and systemically unimportant bank, they believed its failure could be contained.
When regulators couldn’t find a sucker to take it on Lehman was left to die. Almost immediately, all hell broke lose. Credit disappeared, banks everywhere went to the wall – or would have done were it not for taxpayers – and the world entered the deepest recession since the Great Depression, one from which Greece has yet to emerge.
This potted history seems not to trouble the minds of European central bankers and finance ministers, who are clearly comfortable that a Grexit won’t be a Lehman-like event. Bond traders are similarly inclined. Rates on Spanish debt, for example, would be far higher if markets accepted the case for contagion. Clearly they do not. And perhaps the ministers and the markets are right.
The real question, however, is whether the EU, ECB and IMF want to take the risk and find out, just for the sake of a few billion Euros.
The Global Financial Crisis taught us the extent to which seemingly localised decisions have unpredictable, system-wide and frequently catastrophic consequences.
There’s no way of knowing whether an EU-engineered Greek exit from the Euro is another Lehman-like moment but the willingness of European leaders to spin the wheel and find out would be, in the words of Yes, Minister’s Sir Humphrey Appleby, a ‘courageous’ decision.
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