I try not to make forecasts in my writings. Based on economic conditions and politics, I prefer to create several possible scenarios and maybe engage in some handicapping., but the current Mexican standoff occurring between Greece and the troika is just too juicy for me to resist.
These are the facts controlling each side’s position. Greece cannot be allowed to fail, because it will cause a massive market panic that will make Lehman Brother’s failure look like a Sunday picnic in Central Park. The politicians will catch all of the blame for this and lose their jobs in the next election.
Greece will default on its obligations if it does not receive the next tranche of loans in November. The country will neither have the money to maintain government spending nor to pay off loans maturing later in the month. If the politicians fail to reach a compromise that releases the loans, then the Greek government will fall, and the current governing coalition members will be exposed in new elections.
Merkel needs the perception that she is being tough on the periphery in exchange for Germany money. German voters are bailout weary, and the politicians are in campaign mode. She will lose votes if she is not being tough on Greece.
The Greek voters resent being a ward of the troika and are tired of being asked for more and more cuts causing nothing but pain as far as they can see. The politicians in the junior coalition parties are playing to this resentment and need to obtain something for their efforts.
This is the status quo between Greece and the troika. Now, they are playing brinkmanship politics, but this is not the first time. The best example of the current situation is the negotiations that took place before the March 2012 bailout. That crisis was resolved, and the end of the world was avoided.
The current standoff will be resolved, too, because the costs of not resolving it are too high. The resolution pattern will be similar to the one from March. Numbers will be fudged, and a face-saving compromise will be agreed to just in time for Greece to receive the money it needs.
If either party could improve its position by maintaining its current position, I would predict otherwise, but this is not the case. If Greece doesn’t receive the loans, it will go bust, and both sides will suffer greatly. Whatever day the Greek government runs out of money, look for a compromise the day before.