How Greece might avoid a Grexit / THE ECONOMIST.

The Economist explains

How Greece might avoid a Grexit

Jan 5th 2015, 23:50 BY P.W./ http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-1

NOT for the first time, an impending Greek election is fraying European nerves. The snap election that Antonis Samaras, the Greek prime minister, has called for on January 25th has reawakened fears that Greece might have to leave the euro zone, an outcome that was narrowly avoided in 2012 and could still be disastrous both for Greece and the single currency. A Grexit could happen if Syriza, the left-wing opposition party led by Alexis Tsipras, which is currently ahead in the polls, wins the election and confronts Greece’s creditors with demands they find incompatible with Greece staying in the monetary union. A political decision to expel Greece could be enforced by the European Central Bank cutting off Greek banks from its liquidity operations and payments system. Will the Greek election cause a Grexit?

Such an outcome could occur as a consequence of a game of bluff and counter-bluff on the part of Greece and its European creditors, led by the German government. Syriza wants to get relief on the huge debt that Greece owes the euro-zone governments that bailed out Greece. Mr Tsipras may calculate that European creditors will give way in order to avoid a Grexit, which would hurt the euro zone as a whole by breaking the principle that membership of the single currency is irrevocable. Set against his bluff, the German government has a counter-bluff: it wants to send a clear message that it will not cave in to what it regards as blackmail, not least since this would encourage politicians in other bailed-out economies to follow Mr Tsipras’s example.

Last time this game was played, in the summer of 2012, both Greece and Germany blinked. The Greek electorate did so by deciding not to back Syriza, which came second in the June election, enabling Mr Samaras to form a coalition government. And the German government eventually decided to back Mr Samaras and not to impose a Grexit, as it had once contemplated, for fear of the systemic consequences for the euro zone; markets feared that where Greece might lead, others might follow.

On this occasion, both countries once again have reasons to avoid a Grexit, but the balance of bargaining power has shifted away from Greece to Germany. The systemic risk for the euro zone of Greece leaving is less salient than in 2012 because bond yields have collapsed throughout the periphery, not least on expectations that the ECB will adopt a big programme of quantitative easing. That will encourage the German government to take a hard line. The Greeks, for their part, have in any case already endured much pain in order to stay in the euro, which a clear majority regards as good for the country rather than bad. The economy has come out of its tailspin and although Greece is heavily indebted to its official lenders, the terms are extraordinarily lenient. What this suggests is that the pressures within Greece to avoid a confrontation, either by Syriza doing less well than expected at the polls, or through a more emollient stance by Mr Tsipras if he does win power, may be sufficient to avoid a Grexit.