Eurozone Gradually Tightening the Thumbscrews on Greece

     Yesterday I argued that there are a few big questions for what happens next for Greece.

     1. Was the EU bluffing about a Grexit-or not?

     http://diaryofarepublicanhater.blogspot.com/2015/07/what-happens-next-depends-on-whether-or.html

     2. What is the best course for Greece? It's possible that even if the EU were bluffing, Grexit is the best course.

     Ok so let's look at both these questions First 1.

     1. It's not at all clear that the EU is bluffing. I had thought they may well be but this is more based on my attempt to game out what the EU interests-particularly the German interests really are.

     http://diaryofarepublicanhater.blogspot.com/2015/07/germany-will-never-let-greeks-leave-euro.html

     I may have been dead wrong in that post though. My premise was that the Germans gained so much from having a cheap euro compliments of Greece.

    http://diaryofarepublicanhater.blogspot.com/2015/07/germany-and-greece-cowhos-parasite.html

    Still there are 2 possible reasons why this may not happen.

    A. Germany may wrongly understand its own best interests. Or maybe the German authorities-at least Merkel-understand Germany's interests but the German people don't and won't allow Merkel to do what's really in their interests.

    B. I may wrongly understand Germany's best interests.

   There are some mixed messages-from France and Italy-but Germany itself is taking a hard line. Overall, the EU is tightening on Greece even further.

  "Earlier Monday, the European Central Bank had taken the largely symbolic step of asking Greece’s banks to post more collateral against €89 billion in emergency ECB loans that they have needed to meet a massive run by depositors."

 “The ECB’s decision to increase the haircut on collateral Greek banks need to access ELA was a clear sign that the Eurozone is gradually tightening the thumbscrews,” said ING-Diba economist Carsten Brzeski.

  http://fortune.com/2015/07/07/greece-is-set-for-a-bleak-reality-check-as-it-pushes-for-debt-deal/

  None of this means that Greece voted wrong as long as Tsipras himself wasn't bluffing. If he and Syrzia didn't see this coming then it does bode badly. There is a real case that Grexit is the best choice; trouble is that the Greeks themselves don't want this.

  http://diaryofarepublicanhater.blogspot.com/2015/07/lars-christensen-grexit-will-restart.html

  The worry about the drachma is that it would be worthless. However:

  "Greek drachma might not be as worthless as people think."

  "The value of the drachma would definitely fall, but perhaps not as much as people think. And it may not fall as much as it potentially would have if Greece had exited the euro a few years ago, when its recent debt problems surfaced."

   http://fortune.com/2015/07/06/greek-drachma-conversion-euro/

   The reason for this is a marked improvement in Greece's current account. 

   "Greece does tend to do a lot of importing. But there’s good news here. Nomura’s Jens Nordvig, one of Wall Street’s top currency strategists, says that if Greece had exited the euro in late 2011, when such a move seemed possible, the drachma would have likely plunged 30% based on its currency misalignment with other nations. Since then, Greece’s economy has plunged, which, from a currency perspective, is good news, at least in part. The Greek people can afford far fewer imports than they used to. So, Greece’s current account has swung from a deficit of nearly 10% of its GDP in 2011 to a current account surplus of just over 3%."

   "While a currency devaluation will certainly be painful for the Greeks, it will eventually give the country an economic boost, making its exports cheaper. For Greeks, local goods are also likely to be considerably cheaper than imports.Roger Bootle, the founder of London-based markets and economic analysis group Capital Economics, has estimatedthat a one off 30% devaluation in Greece’s currency will boost the nation’s economy by 20%. That’s likely to help Greek currency in the future. So, as long as Greek banks don’t fail, another lurking problem, the drachma could be better off than many think."

   So there is a light at the end of the tunnel-as long as Tsipras himself hasn't been bluffing and is willing to take this step if need be-ie, the EU really is prepared for Grexit.