Grexit a 50/50 possibility…

…according to financier George Soros.

Personally, I have a hard time dealing with Mr. Soros’s Donald Trump-ish nature.  In his book The Alchemy of Finance, for example, he claims to have invented the thesis-anti-thesis-synthesis explanatory pattern that was introduced to European thought by Hegel in 1807 and developed by Marx later in that century.  Hard to believe Mr. Soros, who studied philosophy, is completely unaware of either of these seminal figures.  I’ve also thought that a significant amount of the success of his Quantum Fund was due to Soros’ less well-known partner, Jim Rogers.

If there’s one thing, George Soros knows about, however, it’s currencies and politics.  So his view that it’s a flip of a coin whether Greece stays in the EU or leaves, is well worth listening to.

The short story of Greece’s woes is that after joining the EU it racked up so much sovereign debt using the implicit repayment guarantee of being in the euro (kind of like having a credit card that can’t be maxed out) that it can’t possibly pay all of it back.  The gravity of the situation came to light several years ago when a newly installed (and now gone) government announced  the previous administration had been falsifying the country’s national economic accounts  for years.

Greece has since been negotiating for debt concessions in return for ending its spendthrift ways.  Its strategy so far has been to promise reform in return for debt relief   …but to do nothing.    This tactic seems to have recently passed its “sell by” date.  The EU and the IMF now appear to believe that the moral hazard risk of continue to accommodate Greece is worse than the potential damage to the Eurozone from expelling it.

As I see it, the ball is now clearly in Athens’ court.

For what it’s worth, I think Grexit would turn out to be a genuine tragedy for Greece, but far less damaging to the euro than is commonly believed.  Rather than giving encouragement to breakaway movements in the UK, Spain and elsewhere, I think Greece outside the EU–substantial currency depreciation, loss of access to external finance–would serve as a cautionary tale instead.    Think Argentina without the farm wealth.

My guess is that the euro would decline a bit on Grexit.  The banks might have a rocky time, too.  It’s very possible, though, that the markets would be happy just to have the situation resolved–and that any fallout would be small and short in duration.

 

 

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