Euro Crisis: Cold morning after a hot night in Athens…

Twitter was burning with indignation last night (as it often is) that the MSM did not throw any attention on the crisis in Athens as the Greek Parliament acted upon the German ultimatum to impose an austerity package that may see the new government washed away in the upcoming general election in April.

I suppose that takes care of whether Greece defaults in the near term or not. As Pete has pointed out, the package is not enough to prevent a Greek default per se, merely a disorderly one (possibly as early as this morning, if that vote had not gone through).

In the end, it went through quite easily, with both the current ruling party and former ruling party coming together and squeezing out some of the austerity rebels along the way:

Simon NIxon, writing in the Wall Street Journal believes all the players in this drama have been acting in their own national economic interest:

For most of the last two years, the euro zone has done what is necessary to prevent a catastrophic collapse of the euro zone while seeking to avoid rich countries having to take responsibility for the debts of the corrupt, unreliable and unreformed economies of Southern Europe. This approach, which many argue has been too slow and inadequate, has been entirely rational.

For rich European countries, it makes economic sense to preserve the euro, but not if the price is to write blank checks in perpetuity to countries whose political systems can’t be trusted. It follows that the key to resolving the crisis isn’t expanding bailout funds or devising clever European Central Bank programs but creating the conditions for trust.

But the Greeks, having once defaulted on the promise of reforms under the previous PASOK led government, find themselves in a very different position:

No one can say for sure how much better a position Greece might be in now if previous Prime Minister George Papandreou had delivered on commitments to cut the vast public sector, liberalize markets, collect taxes and privatize assets. But what is clear is that many Greeks miscalculated: they failed to appreciate how far the country’s hands had been tied by the ECB. Much ink has been spilled trying to work out whether Greece’s private-sector debt restructuring is voluntary or coercive, whether it will trigger credit-default swaps, or whether bond investors would be better off pushing Greece into a hard default. But this misses the point: the only definition of a voluntary deal that has ever mattered is one that doesn’t inflict losses on the ECB. The need to shield the ECB, which owns around €45 billion of Greek bonds, took off the table what many fantasized was Greece’s best option: simply repudiating its debts while remaining within the euro zone.

Now, Nixon adds, the choices facing Greece are between tough and unbelievably nut-crunchingly tough:

Greece has no option but to respect the wishes of the ECB, both now and in the future: Greek banks are heavily reliant on the ECB for liquidity, much of it provided against collateral in the form of bonds guaranteed by the Greek state. If Greece defaulted on its debts to the ECB, the ECB couldn’t credibly continue to supply this liquidity. Greek banks would immediately go bust and Greece’s financial system would collapse. The country’s only option would be to leave the euro. No sensible Greek wants to test the ECB’s resolve. The terms of the bailout may seem harsh, but not as harsh as the conditions Greece would face outside the euro: cut off from external finance, its banking system bust and without access to hard currency to pay for imports, the country would descend into chaos.

“No option but to respect the wishes of the ECB”… That would be compliance to the German ultimatum… which brings me to a letter from that quarter to Gavin Sheridan at… which sort of confirms that this is almost exactly where Ireland found itself in November 2010, when Brian Lenihan found Ireland’s interest would only be considered as a subsidiary to the bigger economies in the Eurozone who found themselves vulnerable to Irish debt…

In his refusal to divulge the letter sent to Irish Finance Minister at the time, Draghi nevertheless explains to Sheridan that…

The confidential communication was aimed at discussing measures conducive to protecting the effectiveness and integrity of the ECB’s monetary policy and fostering an environment that ultimately contributes to restoring confidence among investors in the overall solvency and sustainability of the Irish financial sector and markets, which, in turn, is of overriding importance for the smooth conduct of monetary policy. [emphasis added]

For now, at least, Nixon reckons that despite the political rhetoric, the southern countries are acting rationally by following the money, until April at least. And he also dismisses those who argue that lack of growth is the most pressing problem facing Greece and the other crisis-hit countries:

Like the ECB’s offer of three-year loans to banks, which has done much to improve confidence by removing the risk of a systemic banking crisis, a new Greek bailout will remove the risk of an imminent sovereign default. That buys Greece time to rebuild trust with the euro zone and it buys the euro zone time to develop more lasting solutions to the crisis.

For now, Ireland seems to be out of the picture. So long as this ragbag of a currency remains whole and intact, it may well stay that way. So long, as the Irish Times notes, the medicine doesn’t kill the Greek patient. But we now know, rather unambiguously, where the ECB’s priorities lie.

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