An indebted merchant, who is having trouble sleeping at night, lives across the street from another merchant, who happens to be both neighbor and lender to the debtor. This is the scene in a famous Turkish fable that takes place in the city of Kayseri, a city anecdotally famous for its shrewd merchants located in the east of Turkey. With many different variations often recited, the story goes that the neighbor in debt tosses and turns all night long, unsure of how he will come up with the money to repay the debt which matures in the morning. As the night drags on, he can no longer take it, he draws the curtains and opens the shutters, "Hey neighbor!" he shouts. "Yes, what is it at this hour?" replies the irritated neighbor, now awoken from a restful sleep. "You know the money I owe you tomorrow?" he asks. "I can't figure out how I will repay you and it's keeping me from going to sleep." "Why did you wake me up to tell me this in the middle of the night?" screams the now visibly furious neighbor. "Well I just wanted to let you know that I won't be able to pay you and get it off my chest now, so that I can go to sleep, you stay up and figure out a solution."
This famous Turkish fable is one which illustrates the dynamics between lender and debtor, and how their fates are intertwined. Will the lender be unable to conduct his or her business the following day? Will he or she continue the cycle by defaulting on his or her loan? The modern version of this fable is being played out right now in neighboring Greece. Luckily, Turkey isn't the neighbor which Greece is indebted to, however, the contagion effect is one in which all players are effected by the most simple of defaults. Last week Greek Finance Minister Yanis Varoufakis warned of the contagion effect that a Greek default would result in.
Greece defaulting on its loans and ultimately exiting the eurozone would be more disastrous for the eurozone that it would be for Greece. The eurozone is approximately 85 times bigger than Greece, meaning that if the default of Greece results in a 1 percent decrease in the gross domestic product (GDP) of the remaining nations or that the cost of doing business is now greater because of the first eurozone default, the net result would be worse than Greece's economy completely collapsing and being wiped out. While an exit from the eurozone is not something most Greeks want, it would hardly spell the end of the Greek economy.
Last week both the Greek and German finance ministers discussed the future of Greece and the eurozone in meetings in Washington, D.C., following the International Monetary Fund (IMF) and World Bank conferences. Reports out of closed-door meetings vary, however, many are predicting an imminent Greek exit as it appears to be unable to honor the previous bailout agreements. I continue to believe that this is just a high-stakes game of "chicken" being played by both sides. Although the Greeks don't want to exit the eurozone it appears they have little choice, giving them nothing to lose. The eurozone member states and the European Central Bank (ECB), however, carry over 90 percent of Greek debt, meaning the effects of a default would primarily impact Europe first and foremost. Turkey and neighboring trading partners with the eurozone would also be affected but to a lesser extent.
Why has this dragged on for so long and what's the endgame here? Both sides have drawn this out because immediately accommodating the Syriza government's requests to renegotiate the terms of a bailout package would forever embolden the European electorate to elect governments which will thumb their noses at the Frankfurt elite. So the soap opera must continue until the final hour. When all hope is lost, a final last-minute deal will be stumbled upon which will save Greece and more importantly, save face for the eurozone. Or not.
There is a chance that the ECB can't risk sending mixed messages to Spain, Portugal, Italy, and Cyprus and that the last few years have been a test to gauge global reaction to a "Grexit." Had the ECB planned to let Greece die a slow death all along? While trading the debt of individual investors, corporations, banks, and other non-Europeans for debt held almost entirely by the ECB and non-eurozone Europeans? Perhaps. Whatever the motivations, the final act is near its conclusion. Will the world witness a modern day "Greek tragedy" or a story of forgiveness, salvation, and redemption? The need for continued quantitative easing by the ECB couldn't come at a better time, it appears Greece will prevail.