Does Greece have more leverage with the EU than perceived?

As the EU dithers in interminable discussions, it seems to be digging themselves into an ever bigger hole. Yesterday acting IMF head John Lipsky told them to cut short debate on private sector involvement. US authorities seem terrified of a Greek default event. Likewise the ECB trembles at the mere reference of the 'R" word. In this backdrop, what if Greece turns down the new bailout facility, refusing to accept more austerity, shrinking GDP, massive unemployment and rising public debt?

The Americans seem worried that their CDS derivatives market is underfunded. If there is a call by a Greek default, those American institutions underwriting these derivatives will be thrown into insolvency. The ECB is rapidly becoming one of the largest bad banks in the world with heavy Greek sovereign debt exposure.

So far the Greek Socialists have been trying to accommodate the EU and IMF to the letter without much concern for the deep recession, mounting unemployment and rising public debt, which is slowing becoming a tremendous political albatross to carry. They - like other EU Socialists - are wed to the Euro and EU integration concept. The Greek conservative party vetoed last year the IMF/ EU bailout. It is insisting on renegotiation of the second bailout facility terms.

At this point, Greece hardly needs another new loan facility that it cannot pay. The government has been overreaching its tax base. The arguments about tax evasion are mainly an excuse to justify overstated, unrealistic revenue projections in order to take pressure off reduction of spending. With the deep recession, tax receipts are falling.

The EU privatization ideas may well be a Hail Mary pass. Many of state corporations hide significant liabilities. The past history of privatization in Greece has been difficult. Foreign investors have often been burned. COSCO has yet to turn a profit in its Piraeus terminal facilities. Deutsche Telecom has been generally disappointed with their Greek telecommunications investment results.

What if the Greeks refuse the new bailout facility, admitting that they cannot meet the conditions? What if the Greeks admit their insolvency and formally ask for relief in loan restructuring?

What will the US and the EU authorities do? Will they leave Greece to default? If there is a Greek credit event, who will face the biggest damages - the US CDS market, the EU banking system, the ECB or Greece?

It may well prove that the damages to Greece will be far less than the counterparty losses or at least this seems to be the general perception of the US and EU authorities. Their thrashing around and threats to Greece may be more of a sign of their weak position rather than strength.

The worst case scenario of debt default, return to Drachma, and deep external devaluation might even speed up recovery. EZ membership is losing its allure to The Americans seem worried that there is nothing behind their CDS derivatives market.  If CDS are called by a Greek default, those American institutions underwriting these derivatives will be thrown into insolvency.  The ECB is rapidly becoming one of the largest bad banks in the world with heavy Greek sovereign debt exposure.

So far the Greek Socialists have been trying to accommodate the EU and IMF to the letter without much concern for the deep recession, mounting unemployment and rising public debt, which is slowing becoming a tremendous political albatross to carry.  They - like other EU Socialists - are wed to the Euro and EU integration concept.  The Greek conservative party vetoed  last year the IMF/ EU bailout.  It is insisting on renegotiation of the second bailout facility.

At this point, Greece hardly needs another new loan facility that it cannot pay.  The government has been overreaching its tax base.   The arguments about tax evasion are mainly an excuse to justify overstated, unrealistic revenue projections in order to take pressure off reduction of spending.  With the deep recession, tax receipts are falling. 

The EU privatization ideas may well be a Hail Mary pass.  Many of state corporations hide significant liabilities.  The past history of privatization in Greece has been difficult.  Foreign investors have often been burned.  COSCO has yet to turn a profit in its Piraeus terminal facilities. Deutsche Telecom has been generally disappointed with their Greek telecommunications investment results.

What if the Greeks refuse the new bailout facility, admitting that they cannot  meet the conditions?  What if the Greeks admit their insolvency and formally ask for relief in loan restructuring?

What will the US and the EU authorities do?  Will they leave Greece to default?  If there is a Greek credit event, who will face the biggest damages - the US CDS market, the EU banking system, the ECB or Greece?

It may well prove that the damages to Greece will be far less than the counter party losses or at least this seems to be the general perception of the US and EU authorities.  Their thrashing around and threats to Greece may be more of a sign of weakness rather than strength.

The worst case scenario of debt default, return to Drachma, and deep external devaluation might even speed up recovery.   A double standard Euro is becoming toxic to the EU Periphery.