Threat of Greek euro exit could complicate ECB's quantitative easing
Prospect of debt relief for euro-zone member may complicate ECB's quantitative easing push
The return of the idea of a Greek euro exit, as boogeyman or genuine threat, comes at a particularly difficult time, dangerously complicating the already fraught advent of full-scale quantitative easing in the euro zone.
A parliamentary vote, set to begin next week, to replace the Greek president may trigger general elections in the new year, elections that the anti-bailout party Syriza could well win.
"We shed blood to take the word 'Grexit' away from the mouth of foreigners, and Syriza is bringing this word back to their mouths," Prime Minister Antonis Samaras said, using once more the highly emotive term for a Greek parting of ways with the euro project.
The very idea, much less its invocation by the prime minister, panics Greek markets.
Even beyond Greece's own grave difficulties, should Syriza win an election, it would shortly enter into negotiations, if not conflict, with the of the European Commission, the International Monetary Fund and the European Central Bank over the terms of the bailout. That does not have to end with a euro line-up change, but the term and the idea will be batted about, with predictable results.
Almost no matter how you slice it, Greece, with a quarter of its population unemployed and having lost a quarter of its economic output, is poorly positioned to shoulder its debt load.
While Syriza has backed off from euro exit as a position, it did in May call for a write-off of almost a third of Greek debt, and in September for euro-zone debt relief for the country, perhaps by replacing existing debt with new bonds linked to gross domestic product growth.
First off in any such negotiation the threat of default or of an exit are tactics that will be used. This will have predictable results on global capital markets, not simply making things tougher for Greece but potentially bleeding over into the bonds of other weaker euro-zone members.
If, of course, Greece's debt load is to be lightened in some way, the existing holders of its debt will have to decide who takes the loss that will represent.
Step back then and consider the situation of the ECB. Facing a quite real threat of deflation, the ECB took pains at its last meeting to stress that it "intends" to expand its balance sheet to €3 trillion (HK$28.9 trillion) and that it would "reassess" monetary policy in the new year. Further, ECB president Mario Draghi said he did not require "unanimity" to go ahead with quantitative easing.
Despite widely reported German objections to such a move, Draghi went on to imply it would happen anyway.
One German objection to this type of quantitative easing is that it breaks a ban on outright financing of member states by the ECB.
This is where things get complicated. For Greece to get a better deal out of the , the ECB is going to have to sign off on some form of debt relief, be it longer term or lower interest rate. That means the ECB will take a loss. It also opens itself up to yet another charge of direct financing, though it is far from clear that this is what a restructuring including the ECB would represent.
In other words, should the do something for Greece, the opponents of quantitative easing will have more ammunition.
The ECB meets once in January, just maybe before any Greek general election could be held.
If the ECB does want to get on with quantitative easing, it may have new reason to hurry.
