Confused about the Grexit talk

 I am late to the party here, but better late than never.

I am confused as to why there is so much talk of Grexit these days. For example, at the previous link, Tyler Cowen writes,  “So I think Germany will play brinksmanship with Syriza and, when the time comes, simply pull the plug and leave them high and dry.” 

But what does it mean to “pull the plug ”on the Republic of Greece? Let’s say Alexis Tsipras is elected Prime Minister and promptly proceeds to tell all foreign creditors (save the IMF) to get stuffed. He would certainly lose access to foreign credit ... but the Greek government is running a primary budget surplus, so why would he care? 

More concretely, according to the IMF (page 45), in 2015 will Greece run a budget deficit of €3.5 bilion, but it will have to make interest payments on its debts of €9.1 billion. Eliminate those interest payments, and the Greek government will not have to a borrow a dime, save for very-short term expenditure smoothing. Of that €9.1 billion, only €743 million is due the IMF, so as long as the IMF agrees to roll over its debt then Greece can remain in that organization’s good graces while stiffing everyone else, public or private.   

(Our hypothetical radical Tsipras  government, if it were smart, would issue special instruments to the banks to enable them to continue to collect interest on their holdings of government debt.)

So Angela Merkel cannot muscle Greece by threatening to deny new credit. What else? Well, Greek banks need support from the ECB. Well, if I understand these procedures correctly, the governing council of the ECB would need a ⅔rds supermajority to cut off the Greek banks from emergency liquidity assistance. Could the Germans muster a ⅔rds supermajority? I am having trouble seeing how.

Moreover, cutting off the Greek banks would generate huge losses for the ECB. It has lent about €44 billion to Greek banks and the Greek central bank owes the rest of the Eurosystem around €38 billion. Sure, as far as I can tell those losses would have no economic meaning ... but we’ve got ample evidence these days that European policymakers, elected and otherwise, put great stock in avoiding them. 

Add to that the systemic risk of letting the Greek financial system go down the tubes, and it is really hard to imagine that particular plug being pulled.

Note that the Greeks will almost certainly not default in the big bang described here. But even if they did, I do not see what the Germans could do to force them out of the eurozone. The Greek government might choose to leave, of course, but that is a different issue.

So what am I missing? Help! 

Comments

[J.H.]

You aren't missing anything I think....other than that it is a very good talking point from a journalistic point of view. In fact this much is acknowledged by Matt Yglesias in a contrary view quoted by Tyler Cowan in your link to all the recent talk about Grexit.

As was already established over two years ago (http://noelmaurer.typepad.com/aab/2012/05/we-been-saying-this-for-a-while-now.html#comments and http://noelmaurer.typepad.com/aab/2013/03/i-was-wrong-about-the-euro-but-that-turns-out-to-be-a-bad-thing-for-europe.html#comments), the legal complications means you have to get very far along in a scenario of banking system and economic collapse before you get a government carrying out a euro-exit with popular support. And as you adequately described (http://noelmaurer.typepad.com/aab/2013/04/why-cyprus-wont-leave-the-eurozone.html), there are many losers and winners from an exit, but a lot of politically powerful short-term losers which makes euro-exit a non-starter for governments unless things go REALLY bad.

And as this legal analysis (http://eulawanalysis.blogspot.com/2014/12/the-beginning-of-end-for-euro-eu-law.html) notes, SYRIZA's goal isn't even to leave the EU or the euro, so really, all this talk is really more or less empty talk with very little foundation.