The Greek Sovereign Debt Train Wreck Becomes Dire

The Greek sovereign debt drama became much more intriguing tonight. The Financial Times is reporting that ECB/EU/IMF (the ‘troika’) officials are attempting to obtain cross-party agreement within Greece to implement internationally supervised divestitures of state-owned assets and tax collection. Yes, you read that correctly, Greece is being forced into allowing international supervision of its domestic tax collections. Simply put, as someone who has traveled throughout Greece and who has many Greek friends, expect this to end badly.

As I have noted previously I see two viable solutions to the Greece/Eurozone sovereign debt crisis:

  • ECB monetization of a large chunk of Greek sovereign debt (30-50%) and a giant step toward a federal approach within the Eurozone.
  • An ECB/EU/IMF coalition that is unwilling to paper over the problem any longer, which results in a decision to get ‘tough’ on Greece. Such an aggressive posture from the ECB/EU/IMF (including large scale sales of state assets and taxation oversight/enforcement) will inevitably lead to Greece’s exit from the Eurozone.

The new much harsher austerity measures which could potentially include international supervision of tax collections are sure to draw unanimous condemnation within Greece and would be surefire political suicide for any political parties agreeing to such measures. Of course, tax collection is a major problem for Greece and one senior EU diplomat is quoted as saying “the state is not functioning”, I can confirm this anecdotally.

The front runner for the role of next ECB President, Lorenzo Bini Smaghi, is quoted in the Financial Times this evening as stating:

“A debt restructuring, or exiting the euro, would be like the death penalty – which we have abolished in the European Union. On top of that drastic measures such as a default or restructuring would produce contagion effects in other countries and affect taxpayers in the other countries. Why should they pay for the mistakes of others?” Smaghi

When asked about former Bundesbank chief economist Issing’s comment that Greece should not have been allowed to join the euro, Smaghi responded “It is not a very useful statement at this point”- giving mild comic relief to an otherwise sobering interview in which Smaghi voiced his (the ECB) strong opposition to any form of Greek debt restructuring.

The Greek problem is a very serious one which has entered into a much more urgent phase during the past several weeks. It would be foolish to ignore Greece and the potential ramifications of Greece’s exit from the Eurozone.

Update:

Der Spiegel is out this morning with another must read interview with EU Currency Commissioner Olli Rehn. Rehn says:

“Athens has diverged somewhat from its original reorganization plan. The Greeks have begun talking about a debt restructuring. This curbed their enthusiasm over implementing reforms. For instance, tax evasion was simply not pursued as successfully as would have been advisable.”

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