Greece optimist throws in towel

Erik Nielsen likes to spend Sunday mornings ruminating over the world economy at a cafe near his west London home.

Finding his favored Caffe Nero too crowded on Mother’s Day, the chief global economist of UniCredit Bank AG beat a retreat to his own study. From there, he also changed direction on Greece.

“I am throwing in the towel,” Nielsen wrote in his “Sunday Wrap” report. “If they don’t want to play by the rules (and the past weeks give me little hope,) they should get ready to leave!”

“And please appreciate what a difficult conclusion that is to draw for a deeply committed European like myself,” said Nielsen, who previously worked at the International Monetary Fund and Goldman Sachs Group Inc.

The reason? Greek Prime Minister Alexis Tsipras’s call last week that Germany pay World War II reparations shows things have gone “plain nuts” in Athens. That, combined with what he called “blatant hypocrisy” and ignorance of the constraints facing the European Central Bank, shows all the parties need to brace for Greece’s exit from the euro.

Tsipras is facing the choice of either signing up to economic policies demanded in return for aid or accepting life outside the euro area and “virtually certain collapse” of the economy, according to Nielsen.

“If the Greek government does not want the first option, it should prepare for the second option so that the exit becomes as orderly as possible,” he said, proposing the choice of reform or rupture be put to the electorate.

Risk Reversal

Until Sunday, Nielsen had sounded more confident that Greece would remain in the 19-nation currency bloc. Just last month, he said the government had surrendered to “reality” in agreeing to concessions keep the bailout on track. In January, he said fumbled negotiations and the loss of outside support was “no more than a tail-end risk.”

The rest of Europe is now “easily robust” enough to manage the departure; allowing itself to be bullied by one nation may “well be at greater risk than what comes from one member deciding to leave,” he wrote.

An orderly exit still would require the conversion of euro-denominated debt to new drachmas and capital controls. The government would default on all foreign claims and the economy could shrink as much as 40 percent. It could take as long as a decade to stablilize and trigger mass migration in the meantime.

“I still hold hope that sanity returns to Greek politics,” said Nielsen. “But if not, the rest of Europe needs to draw a line in the sand, and the Greek government should draw the conclusion, ask the people, and make the necessary preparations.”


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