Letter: The $100 Bet on Greece

HJL,

As I write this, Greece and its financial woes are in the news again. There is nothing especially surprising about that, as Greece has been there before. Greece has been in a state of “soft default” since at least 2009. For the last five years Greece and the EU have engaged in on again – off again negotiations trying to tap dance around what has become known as “The Greek Debt Crisis”. The can, as they say, has been kicked down the road several times.

At the end of this month (June 2015), Greece is due to cough up about $1.8 billion in an interim payment to the EU. The Greek government has already said they will have to borrow the money to be able to make the payment. How quaint.

But is it different this time? It just could be. Up to now, the two players in this comedy/drama have been the European Union and Greece. The EU has talked tough, but typically has caved in at the last minute, fearful of Greek threats to leave the EU, abandon the Euro and re-issue their own currency. The EU responds with bridge loans, deadline extensions and increased demands. Greece, for its part has enacted some financial austerity measures, tax increases, and regulatory control, all of which have been quite unpopular with Greek citizens. Demonstrations and riots by the population protesting austerity have been common, and the Greek economy is suffering near depression level devastation.

In January 2015, Greece elected a socialist, Alexis Tsipras, to the office of Prime Minister after he promised a hard stance toward the EU and elimination of much of the financial austerity the EU was demanding. Sort of the Greek equivalent of a car in every garage, two chickens in every pot and forgiving your debt.

The Bet

If you had $100 to spread on the possible outcomes of the current Greek payment dilemma, how much would you put on each possibility? Here are the choices as I see them.

• Choice #1. The EU caves in as usual, and kicks the can down the road. The payment deadline is extended with the explanation and platitudes that “talks are continuing and progress is being made”. Greece promises “more austerity”, begs for mercy, and perhaps makes a nominal payment.
• Choice #2. Greece goes into hard default, leaves the EU.
• Choice #3. (Wild Card # One) Vladimir Putin (Russia) steps in and loans Greece the money to make the payment.
• Choice #4. (Wild Card # Two) Barrack Obama (the United States) steps in and loans Greece the money to make the payment.

Here is where I would put my $100.

• Choice #1. $40 (A 40% chance)
• Choice #2. $0 (No bet)
• Choice #3. $20 (A 20% chance)
• Choice #4. $40 (A 40% chance)

Now for the explanations.

• Choice #1 really needs no explanation. In summary, it’s the same old – same old.
• Choice #2 is almost as easy to explain. Greece needs the EU a lot more than the EU needs Greece. Leaving the European Union would not solve Greece’s financial problems. In fact, those problems would likely become much worse. If Greece left the EU they would have to drop the Euro and re-issue their traditional currency, the Drachma. The socialistic promises the Greek government has made to the population over the years would still have to be dealt with and they would have a much weaker currency with limited international acceptance with which to do it. Increasing civil unrest would be a certainty. Even extreme left wing Prime Minister Alexis Tsipras must realize this.
• Choice #3. Ridiculous, you say? Maybe not. Russia would love to have an “in” to western Europe. Putin has already made several statements hinting that Russia might do business with Greece to help with their debt repayments. A natural gas pipeline from Russia to Greece has already been mentioned as a possibility. The current government in Greece is not nearly as “pro-western” as in the past, and is certainly looking for a way out of their financial mess, so don’t dismiss Choice #3 without serious thought.
• Choice #4. A U.S. bailout of Greece? This is a very real possibility. There are three reasons I rate this as a strong possibility.
  1. The U.S. does not want the European Union to fall apart. If Greece bolts the EU, Portugal, Italy and Spain could follow. These four countries are collectively called “The PIGS”. They all have essentially the same economic problems, though at the moment Greece is in the worst shape of the four. If one or more of these four left the European Union, there, as they say, goes the ball game.

     Collectively the EU is an important trade partner of the U.S., and stands as a bulwark against eastern Europe and Asia.

  2. If it actually appears that Russia might bail out Greece, the U.S. would likely jump in and try to preempt any deal Putin would make. A United States deal rather than a Russian one would be backed by most other members of the EU, especially Germany. At the moment Germany is the economic strongman in the EU and would wield considerably more influence than any other member. Germany has never been overjoyed at sharing an eastern border with Russia, and would justifiably become absolutely paranoid at also sharing a western border with one or more countries under strong Russian influence. If Choice #1 fails, Germany will back Choice #4.
  3. In the last decade, the U.S. has turned decidedly more to the left politically. Whatever the reasons for this, the voting majority now sees adrift toward European Socialism as a desirable direction for the U.S., even if many who advocate it don’t understand it. To be “more like Europe” is a goal that many, including some elected officials, openly advocate. In short, the European Union has become a “kindred spirit” in the minds of many in the U.S.. Watching them fail would be an admission of defeat for the economic system that some in this country aspire to. If a smooth solution (essentially, Choice #1) isn’t forthcoming, I believe the U.S. taxpayer will be the financial backstop for Greece.

Well, now you know where I would put my money. In the end, I believe Greece and the EU will both blink. How would you bet? Just don’t bet the rent money that Choice #4 won’t happen! – NCL