The Final Act of an Entertaining Greek Tragedy

The Greek bailout/default story continues to be a solid crowd pleaser with an easily recognizable list of characters and ability to be serialized.  Germany, the fiscally conservative powerhouse of the EU, in its role as the tragic hero, has said and done all the "right" things to no avail.  In fact, Germany's prescription of fiscal austerity has well and truly finished off the Greek economy, and our hero now realizes that the only way out is to jettison its principles and turn its back on history - AKA, "back Greece and print Euros".


For the international media this Greek tragedy has been a bonanza.  First, we've been presented with the shocking expose of how Greece cheated and lied to join the Euro (everyone knew this, but nothing beats simply republishing old material); second, we're brought the amazing story of how Greeks don't like austerity (really, who does?) complete with images of rioting in the streets (nice footage); third, the media happily brings us the news that government pledges turn out to be nothing but empty rhetoric (we are all shocked); and so on and so forth.  Together these episodes in this latest Greek tragedy are entertaining while adding to the audience's sense of inevitable doom.  Now, as the curtain rises for the final act, the audience sits in rapt suspense.


It is this rapt attention and suspense which is, in fact, the biggest tragedy.  From the very beginning, the main storyline has been the possible, probable, perhaps almost "certain" Greek default, but even in the first act in 2010 it became obvious that there was nothing uncertain about a Greek default - unless someone credible wrote a blank check.  In the process of presenting this tragedy the politicians and the media have managed the improbable - they have manipulated the audience to such an extent that the very meaning of the word "default" has become a topic of debate.  Everyone knows that if you don't service your loan and don't pay back the agreed upon final amount at the agreed time, there's a default (even rating agencies and issuers of CDS actually recognize this as a fact and not a topic of debate).  It really is tragic that there still is a sense of suspense; ask yourself, when was the last time anyone thought Greece could afford to service its national debt and raise new loans in the open market?  


In effect, everyone knows that Greece will default unless Germany agrees to write a blank check.  This conclusion rests on simple assumptions: first, the EU will need to continue to bail out Greece (the Greek economy simply can't service the interest payments and make the principal repayments); second, the debt markets are pricing Greek risk at a level which makes it impossible to refinance; third, out of all the Euro countries only Germany has the financial strength to write the required blank check.  If Germany does not write the check, Greece defaults.  If Greece leaves the Euro, Greece defaults.  And tragically, if Germany ignores its own lessons and writes the check, it'll scupper all appearances of EU fiscal responsibility and be inflationary.


On the way out from this Greek tragedy, it's tempting to place all bets on an inflationary spiral, but keep in mind the competing (not "competitive") nature of credit markets, and the "race to the bottom" by the world's leading currencies - after all, everything is relative.  Finally, who wrote all those CDS?