December2014

10ReasonsWhyGreeceWillExittheEuro
Financial markets believe that only an unexpected and undesired accident can lead Greece out of the Euro. We instead
believethatGreeceismorelikelythannottoexittheEuro.Herearethetenreasonswhy:
1.

ThestatusquoisnotacceptabletotheGreekpeople

LastmonthsGreekelectionwasnotanexerciseindemagoguery.TheGreekpeoplecannolongeracceptthediktatfrom
Brussels.Asovereign,notleastagreatnationlikeGreece,bedrockofcivilizationanddemocracy,cannotfollowrulessetby
foreigners forever. No nation can accept living under the boot of foreign technocrats indefinitely and in a democracy,
people eventually vote and reject that foreign authority. Even if Syriza were to do a pirouette and simply acquiesce to
Brussels oversight and commands, the Syriza government would fall before its mandate ends and it would likely be
replacedbyamoreradicalgovernment.Aftersixconsecutiveyearsofeconomiccontractionandoveronequarterofthe
workforceoutofwork,cananyoneblametheGreekpeopleforwantingtomoveawayfromthedisastrouseconomicpolicy
theyhavebeenforcedtofollow?
2.

AselfgovernedandunmonitoredGreeceisnotacceptabletoEurope

The fiscal scandal from Greeces offmarket swaps uncovered in 2010 strongly reinforced the suspicions that European
leadershaveharboredtowardsGreece.Inthiscontextofdistrust,withover200billioneurosofloansalreadygrantedby
European states and combined with an openended future commitment to finance Greeces future debt redemptions,
EuropecannotaccepttoletGreecedecideeconomicpolicyforitself,especiallynotwithoutmonitoring.
3.

GreececannotcountontheEuropeanperipherythistimearound

Previouspolitical,economicandmonetarydecisionshavegenerallydividedEuropebetweenthedebtornations(PIIGS)and
the creditor nations (primarily the core of Germany, Netherlands, Austria and Finland). While such a divide presents
tremendousproblemsinamonetaryunion,itgenerallyhasallowedtheEurozonetosticktogether,especiallywithFrance,
unsureaboutwhichcampitstoodin,alternatingbetweenbothsides.Thistimeisdifferent.Electionsin2015and2016in
Spain,PortugalandIrelandmaybringtopowerSyrizalikeradicalleftpartiescausinganexistentialthreattothecurrent
centristpoliticalparties.SpanishleadersdonotwishtheirGreekhomologuesanysuccessintheirnegotiations.Indeed,the
riseofthePodemosextremeleftpoliticalparty,shapedafteritsGreekcousinSyriza,wouldbecomeunstoppableifSyriza
obtained any leniency. A punishment instead, in the form of a Greek exit, would significantly hamper the ambitions of
PodemosinSpain,SinnFeininIrelandandthePS/LeftBlocinPortugal.
4.

GermanyhasnotdigestedMr.DraghisQE

Germanyhasadeepseatedaversiontousingtheprintingpresstoresolveeconomicproblems;thisisespeciallytruewhen
theeconomicproblemsinquestionarenottheirown.TheGermanpeople,Germanleadership,andofcourse,theGerman
CentralBankfiercelyopposedquantitativeeasing.AtthecreationoftheEuroandtheECB,theECBscharterpromisedto
conductmonetarypolicyaccordingtotheprinciplesoftheBundesbank.Instead,theECBhasbeenconductingmonetary
policy much more like the Bank of Italy. This gives great discomfort to Germans. Germany never fully trusted the Euro
project;itevendecidedtokeepandstoreitsDeutscheMarkbillsjustincasethingswentwrong.Today,Germanshave

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neverbeenmoreskepticalofthecommoncurrencyandshouldMr.DraghiandtherestofEuropewanttokeepGermanyin
theEuro,theywillhavetoshowthattheycanacttoughtowardsthebeneficiariesofGermanlargessewhenthequidpro
quo of money for stringent reform is broken. The Greek crisis comes at a time when, unfortunately, the core of Europe
needstobeappeased.ThemultiplereferencesfromGreekpoliticiansregardingformernaziGermanyhavemadetheissue
morepassionateandtheoutcomelesslikelytoberationalandreasonable.
5.

Greeceisnowstrongenoughtostandonitsowntwofeet

It is impossible to predict with precision how many months the Greek economy might take to stabilize and recover
following a Euro exit, but the country is in a much stronger position today than it was several years ago. Greece is
generating both a primary budget surplus and a current account surplus. In other words, Greece is now living within its
meansandnolongerneedsfundingfromabroadtofinanceitseconomyandgovernmentexpenditures.Itonlyneedsmore
debt in order to repay old debts. In other words, Greeces debt is no longer its problem, but rather the problem of its
lenders;somuchsothatGreekbanksonlyown11%ofGreektreasurybondsand23%ofGreektreasurybills.Theincentive
to default is always significantly greater when nonresidents own the debt. Moreover, Greek exports have gone from
representing 19% of GDP in 2009 to over 30% of GDP today. If a euro exit were to occur, the depreciation in the new
Drachma would further increase Greeces competitiveness and attraction as a tourist destination, thereby providing
significantenginesofnewgrowth.
6.

Europefeelsstrongenoughtocontainanycontagion

Itisfairlyclearthatseveral EuropeanpoliticianswereinfavorofkickingGreeceoutoftheEurobackin2012.Themost
powerfuladvocatewasGermanysfinanceminister(thenandnow)Mr.Schuble.Mrs.Merkelandothers,however,were
frightenedattheideaofcontagionandofunexpectedshockwavesalaLehman.Thebankingsectorwouldlikelyhavebeen
themaincontagionchannelasGermanandFrenchbanksheldlargeGreekassets.However,Europeanbanksnolongerown
alargeamountofGreekassets.Moreover,theECBsstresstesthasprovidedsomecomfortaroundthecapitalizationlevels
ofEuropeanbanks.Lastbutcertainlynotleast,Eurozonesovereignscurrentlyfeelalmostinvincible,borrowingatacheaper
ratethantheUnitedStatesandespeciallysofollowingMr.DraghisQEannouncement.Wedonotsharethebeliefthata
Greekexitwouldnotresultincontagion.Ifonecountryexits,anycountrycan.Anyinvestorintheperipherywouldthen
havetoaccepttheriskofsuddencurrencydevaluation(ariskthatwassupposedtohavedisappearedwiththeintroduction
oftheeuro).Regardless,Europeanpoliticiansarevastlyoverconfidentintheirabilitytowithstandanycontagionandthis
falsesenseofinvulnerabilitysignificantlyincreasesthelikelihoodofaGreekexit.
7.

TheRussianangle

An exit from the Eurozone, while never explored in the treaties, is supposed to also lead to an exit from the European
Union.Untilrecently,itwouldhavemadelittlesensethatGreecewouldfinditselfoutsideoftheEuropeanUnion,evenif
countriesliketheUnitedKingdomareseriouslyconsideringexitingtheEU.However,todaysmajorpoliticaleffortinthe
EuropeanUnionistocounterRussiaandpunishitforitsroleinUkraine.WhilecertainEUcountrieslikeHungaryneverfully
endorsedtheEUpolicytowardsRussia,theydidntvetoiteither.ThatisuntilSyrizacametopowerinGreece.Beyondthe
obviousreligiousOrthodoxtiesbetweenGreeceandRussia,SyrizahasdevelopedstrongtieswithRussiaandvehemently
opposestheEUscurrentpolicytowardsRussia.Mr.VladimirPutinwasthefirstforeignleadertocongratulateMr.Tsipras
byphone.RussiasambassadorwasthefirsttocongratulateMr.Tsiprasinperson.Afterall,radicalleftleadersaroundthe
worldtypicallylookuptoRussia.TheEUfirmlybelievesthatitmustspeakwithonevoiceregardingtheRussian/Ukrainian
conflictandRussiansanctions.However,GreecehasavetorightwhichcanrenderEUforeignpoliciesevenlesseffective.As

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such,takingGreeceoutoftheEuropeanUnionsolvesafundamentalforeignpolicyproblem.Ontheotherhand,Greece
wouldbedelightedtoexportagriculturalproductstoRussiafollowingthelattersbanonWesternfoodimports.
8.

TheEurozonealreadyhastoomanymemberstates

SinceLithuaniajoinedtheEuroinDecember2014,becomingthe19thmemberoftheEurozone,largeEurocentralbanks,
including the Bundesbank, have lost their ability to vote at every monetary policy meeting, having instead to sit out on
votingonceeveryfivemonths.Areturnto18memberswouldallowtheBundesbanktovoteateverymeeting.Webelieve
that there is a high likelihood that the ECB will take away the Greek central banks ability to print euros through the
mechanismknownasELA.DuringthemonthsofFebruaryandMarch2015,thecentralbanksofGreeceandCypruswillnot
havetheabilitytovoteonECBdecisions,neitherwillFranceinFebruarynorItalyinMarch.Thesemonthsaretherefore
particularlyriskyasa2/3rdmajorityofvotersattheECBcouldeffectivelykickGreeceoutoftheeurosystembystarvingits
banksfromliquidity.
9.

Europehassetprecedentsthatwillforcetheexit

EuropeseemstohaveaninsatiablethirstforexploringtheunknownandaGreekexitisthemissingpiecetoitscollectionof
casestudies.ItallowedasovereigndebtrestructuringinGreecein2012.Itallowedsubordinatedbankdebtholderstobe
wiped out in Ireland. It allowed senior bank debt holders to be wiped out in Austria, despite State guarantees. Most
importantly, it allowed, or rather forced, a haircut on deposit holders in Cyprus and even imposed capital controls,
conflictingwiththefundamentalmonetaryunionprincipleoffreemovementsofgoodsandcapitalwithintheEurozone.
Theimplementationofalltheseexperimentsleadsustotwoconclusions.First,everythingthatleadstoacurrencyexithas
already been experimented with, other than the exit itself, thereby making an exit less unpredictable and more likely.
Second, given these past experiences it makes little sense for either depositors, wholesale lenders to Greek banks or
investorsinGreeksecuritiestostickaroundandseeifthecountryendsupstayingintheEurozone.Theseprecedentsshow
that it does not pay off to be an optimist when it comes to hoping that the Eurozone will pick up the bill; which would
explainwhydepositorshavebeentakingtheirmoneyoutofGreece,with14billionwithdrawninJanuaryalone.
10. TheGreeknegotiatorshavenootherleverageandnootherfallbackplan
AlothasbeensaidaboutthepersonalitiesoftheGreekleadersandtheirhandleofgametheory.Ultimately,Greecehas
little to offer the Eurozone. Its main strategy seems to be to threaten a currency exit if they cannot get their ask. The
questionthenbecomeswhatwouldtheGreeknegotiatorsdoiftheEurozonecallstheirbluffandallowsforanexit?Our
belief,havinganalyzedinterventionsfromprimeministerMr.TsiprasandfinanceministerMr.Varoufakisoveranextended
periodoftimeisthattheywouldacceptaeuroexitasafallbackplan.Paraphrasingthem,wemustbereadyforanexit
andhaveaplanB.IftheECBthreatenstoshutdownGreecesELA,wewouldresponddoahead.Wewillmanage.We
believethattheGreeknegotiatorswouldratherexittheEurothanfailtodeliverontheirmandatetoendausterity.
Sincerely,
TortusCapital

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tochangetheirpositionsregardingGreeceandpossiblyincrease,reduce,cover,disposeof,orchangetheformoftheirinvestmentinthesovereignbonds.
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