The Euro Scenarios Explained in the Bluff Poker Between Greece and ECB

A high stakes game of poker is being played on the international arena as Greece clashes with other Euro zone members and the European Central Bank (ECB).

The quarrel is about Greece’s monstrous levels of debt. The question is how much can Greece re-negotiate with the Euro zone members and ECB before the latter abandon their support to Greece.

Who will bluff the hardest? (Write your thoughts down below!)

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THE START OF THE CLASH

Greek elections in January 2015 catapulted political parties with an anti ECB/Euro zone bailout agenda on the central political stage. Greek voters showed their discontent with the country’s precarious situation: high levels of debt (+/-175% of GDP) and lack of any economic recovery.

When Greece ran into financial troubles after the crisis of 2008 and 2009, the ECB and Eurozone members funded Greek’s repayment plan (named “bailout”) in exchange for a stringent austerity program that placed major cuts on Greek spending. Therefore most of the debt is owed to the ECB and the Euro zone members.

There are 2 schools of thought prevailing:

  • Critics of the austerity program say that the spending cuts have worsened economic conditions and make repayment of the debt difficult or impossible as Greece cannot grow;
  • Supporters of the austerity program say that scaling back on expenses and improving structural reform (collection of taxes, etc) is the only long-term viable solution.

Which side do you think is correct?

Regardless of your opinion, at the moment Greece wants a new and better deal (conditions of their debt repayment) whereas the creditors (ECB, Euro members) aim for keeping the current conditions.

FUTURE SCENARIO’S

Whether Greece and the ECB & Euro zone members will find an agreement remains to be seen. Both sides are approaching the negotiation table with sturdy words.

  • The current Greek political leaders won the elections on an anti-bailout agenda, which means that if they back down too soon and too much then they could lose support back home;
  • The ECB & Euro zone members point to earlier debt write offs (€100 billion; €320 billion still remaining) already granted and the lack of reform, tax collection, and saving efforts on the Greek side and are in no mood to reconfigure the previous deal with Greece.

Here is a summary of what could happen depending whether there is a deal or no deal.

NO DEAL: although the Euro zone problems are not as acute as in 2012, a Greek exit (also named Grexit by some) out of the Euro zone will most likely send the Euro plunging lower. An exit could occur when the new Greek political leaders fail to find an agreement with its creditors. In that case, Greece will not receive the financial aid from the ECB & Euro zone members and it will be reliant on the international markets, which ask sky-high borrowing costs. Then it will only be a matter of time before Athens runs out of money and indeed the Euro zone exit occurs.

YES DEAL: of course, there is a high chance of Greece and its counterparties reaching a compromise. In that case, there could be a short-term Euro relief rally but most likely without a long-term effect. Whether the two sides find agreement depends on the details. The negotiations are geared towards discussions on the following topics:

  • Cutting the level of debt which is now at €320 billion. This seems unlikely at the moment;
  • Cutting the repayment interest rate (2%) charged by the ECB to Greece to lower levels. This could be more doable negotiation point;
  • The plan of the new political leaders in Greece to spend more, which will be difficult to convince the European leaders.

Much will depend on the political mood in European capitals (of the Euro zone). Austerity measures are not as popular as they were 3-5 years ago, which gives Greece some leeway. But it still faces key opponents within the Euro zone, such as Germany, Finland, Austria, and the Netherlands, which are not keen on changing course.

Thanks for sharing and wish you Happy Hunting! Don’t forget to drop a note with your thoughts!

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