Playground bullies pick on the weak and the feeble. Extortion (lunch money, allowances,  etc.) are common means of avoidance.

But feeding the bully never does any good. It’s only when the bullied party takes action (a punch in the nose qualifies but so might complaining to the principal),  does resolution of the problem occur.

It’s much harder on a bully facing a gang. Punching a gang leader in the nose could get you killed.

A frequent and unfortunate happening in inner city schools is for the bullied person to seek relief by joining the gang.

I am not talking about Chicago, Detroit, or LA inner-city schools. I am talking about Germany, the ECB, and the gang of 17 vs. Greece.

Who’s the Bully?

In the following discussion, some might object to my posing Germany as the bully. They will claim Greece did this on its own.

The reality is both sides are guilty.  Germany knew (or should have known) that Greece was a bad risk.

There is a price to be paid for making bad loans. That price is inevitable default.  When you insist you do not have to pay a reasonable price for mistakes you made or insist that debt be paid back when it can’t, you become a bully.

Keeping the Gang In Line

A few days ago I saw this report Eurogroup leaves door open for Syriza to partially renegotiate.

On February 2, the EU Observer reported France, US Support Greece in Debt Battle.

That bit of hope did not last long. Yesterday, French President Francois Hollande warned Greek Prime Minister Alexis Tsipras that “respecting the rules is necessary for all, for France too, and it’s not always easy.

Also yesterday, The Financial Times reported Spain Keeps Hawkish Eye on Greece as Southern Solidarity Crumbles.

Gang Solidarity Reached

What happened to the token gestures towards Greece?

Gang leader Germany squashed every overture towards Greece, no matter how slight. Then, having reached solidarity against the outcast, the Mob Enforcer (affectionately known as the ECB) threw down the gauntlet.

For a description of the enforcement process, please see ECB Revokes Greek Bonds as Collateral; ECB vs. Novices; Brass Knuckles.

When it comes to playground bullies there are five possible resolutions.

Five Outcomes

  1. The bullies have a sudden change of heart and voluntarily stop their bullying.
  2. The bullied party perpetually pays the bully’s demands. 
  3. The bullied party joins the gang on the gang’s terms.
  4. The bullies and the bullied agree to a truce on terms favorable to the bully.
  5. The bullied party finally decides it has had enough.

Those are no other choices.

In practice, number one does not happen until everything else has failed a number of times.

On the playground, choices number 2 or 3 most often win. Choice number 4 goes something like this: “Give me another candy bar and I will be your friend.” If the bullied party pays up, The bully soon demands an extra candy bar a week.

Admission of Obvious Truth

The first step in solving a problem is to admit you have one.

In a interview yesterday on Zeit Online, Greek finance minister Yanis Varoufakis admitted the obvious truth: “I’m the Finance Minister of a Bankrupt Country”.

It took an amazing amount of time to admit the obvious truth, but the important point is the truth is finally on the table.

Effectively, Greece finally admitted that it has no more funds to pay the bully. That’s an important step, and it precludes option number 2, perpetual payment to the bully. It also precludes option number 3 because properly joining the gang requires payment owed to the gang, and Greece does not have those funds. It is bankrupt.

Option 4 is the can-kicking exercise everyone hopes for.

However, Greek Prime Minister Alexis Tsipras and his finance minister Yanis Varoufakis have ruled that out. They do not want a can-kicking truce that does not properly take into consideration one simple fact: Greece is bankrupt.

If Greece is truly serious, there’s nothing left but option 5: The bullied party finally decides it has had enough.

Does Option 5 Mean Grexit?

I have been thinking about option 5 quite a bit. What if Greece defaults, but claims it will stay on the euro? Who is going to kick them out of the eurozone gang?

Eurozone Gang Rules

Rules of the eurozone gang are such that once in the gang, no one can kick you out. No one can stop you from leaving, but there is no means to kick someone out.

The ECB can shut off all funding, but as long as Greece maintains a primary account surplus (current account surplus excluding debt service), what is the ECB to do?

Greece does have a primary account surplus (tax receipts are sufficient to pay the bills excluding  debt payments), but if Syriza honors its election promises, that surplus would instantly melt.

Only Solution

A default with the intention of keeping the euro is the only solution, assuming Syriza is truly serious about wanting to stay on the euro.

It will not be easy, but it appears feasible.

Greece would need to institute all kinds of reforms immediately. Syriza would also have to abandon many left-wing proposals and Greece would likely have to agree to pay back the ECB and the IMF in full.

In regards to the bulk of the debt owed, Greece could then ask for and eventually get the debt restructuring conference it wants. The payoff for my proposal would be spectacular.

Spectacular Payoff

  1. Extend-and-pretend solutions for many countries would die on the spot, a much needed event.
  2. Syriza would have to abandon numerous and unrealistic socialist goals.
  3. Unburdened by debt payments, Greece GDP would rise.
  4. Greece could stay on the euro as long as it maintained a primary account surplus.
  5. Hyperinflation would not rear its ugly head as it might if Greece returned to the drachma.
  6. Greek productivity would soar.
  7. Costs would fall and the world would see price-deflation as a good thing, not bad.
  8. Central banks would learn a huge (and badly needed) lesson about sponsoring a proliferation of debt, hoping to meet counterproductive inflation targets.

Ironically, Greece would become more like Germany! Isn’t that what everyone claims to want?

Mike “Mish” Shedlock