The cost of denial

EVENTS in Greece seem to be proceeding with the inevitability of tragedy, as politicians and the electorate balk at the deal in front of them; years of austerity for Greek citizens and years of subsidies from the rest of Europe all to keep the single currency project on track. As has been pointed out here before, it has been a long process of denial; first that Greece had a problem, then that a bailout would be needed, and then that the debt would need to be restructured.

What seems to be motivating the ECB in opposing a restructuring at the moment is the prospect of losses for the rest of the region's banks - the Lehman moment. But whose fault is that? Last year, the Committee of European Bank Supervisors unveiled the result of stress tests that showed only seven banks had failed. This test required the banks to take mark-to-market losses on government bonds held in their trading books, but not on bonds held to maturity since the possibility of default was excluded. It is impossible to believe that the ECB did not approve of this methodology.

Had the stress tests recognised what the markets were indicating even at that stage - that a Greek default was quite likely - then the weak banks could have been identified and recapitalised well before the current crisis. Now we will face the classic problem of uncertainty - investors will not know the extent to which individual banks are exposed and may react accordingly. Moody's placed three French banks on rating review yesterday, although it should be emphasised that the agency is only talking about downgrades of one or two notches (the banks are Aa1 and Aa2, so we are a long way from junk bond status).

Alas, for Greece, default is by no means an easy way out. It would mean the collapse of the banking system and who would bail it out? The only plausible support would come from the EU and the IMF; the two groups causing so much resentment at the moment. Going it alone would mean that Greece would be cut off from the credit markets; it would have to balance its budget immediately. So austerity (benefit cuts and job losses) would be required anyway.

Meanwhile, those living in Anglo-Saxon countries should beware of being too smug. There is a tendency, in the British press, to see pictures of riots in Athens and think "Oh, those excitable Continentals". But the evidence suggests that the vast majority of Greek demonstrators were peaceful and a small minority of anarchists caused the trouble. And that was exactly the explanation put forward last year when the Conservative party HQ in London was ransacked; a small minority seizes the moment and gives the media the pictures they "want". In Britain, austerity has barely begun and yet June 30 is set for both a civil service and teachers strike, not to mention the inevitable Tube walkout led by Bob Crow. Even in America, the Wisconsin state capitol was occupied this year in protests against an austerity (and union-bashing) agenda; indeed, the protests are still going on. The kind of austerity plan being imposed on Greece would probably provoke a violent reaction in most countries.