Will Greece, Europe Split Even If Move Is Bad For Both?

The endlessly strained relations between Athens and its creditors have devolved from a Greek drama to a soap opera . .. or a Tammy Wynette song. Another round of brinksmanship has the beleaguered country at yet another impasse just as its cash is running dry. Its new leftist government is still blustering about debt "restructuring" as international creditors repeat, firmly, that real reforms are needed before more aid will be unlocked.

Most analysts believe the Greek government will blink, and the eurozone will be remain intact, but that more drama and posturing will unfold before that moment arrives.

"The cost of letting Greece go is so high and the implications (of a Greek exit) would be devastating, no matter how bad the relationship," said Adolfo Laurenti, chief international economist for Mesirow Financial.

But the longer the bad romance drags on, the more some analysts take a different view.

"The case for keeping Greece in is thin," said Allen Sinai, chief economist and strategist for Decision Economics. "My advice to the policymakers would be to agree that Greece will exit and to work out the details rather than trying to postpone what ultimately is intractable. Divorces can be amicable or chaotic but they're almost always very costly.

So Much Drama

Sinai believes the unknowns of letting the first country exit the bloc are outweighed by the price of keeping it in, including austerity for Greek citizens, a flight of capital from the country's banks and a redistribution of funds from taxpayers in the core.

"There is no other country that got as much from the center from Europe as Greece did and it's the smallest," Sinai said. "It boggles the mind.

Many couples stick together for the good of the kids, a lower cost of housing and the advantages of filing a dual tax return. Something similar is playing out between Greece and the rest of Europe — with some observers urging each party to get on with its life.

Still, most analysts believe this time won't be different. A Greek exit "would be difficult for the eurozone but worse for Greece," Laurenti said. "My cynical view is that at the very end, the Greek government will learn their lessons. Unfortunately they're learning on the job. They are neophytes and their learning curve is incredibly steep but they'll do the right thing because they don't have any other options.

Jacob Funk Kirkegaard, a senior fellow with the Peterson Institute for International Economics, also thinks the Tsipras government will fold as it runs out of cash and options.

The Neverending 'Endgame'

"There's no doubt that we are getting to the endgame," he said in an interview. "The government has been scraping the bottom of the barrel. Whether it's April 9 or April 20 is hard to say but we're talking weeks before the Greek government is going to have to make politically painful choices between paying contractors, retiree benefits, public sector wages or its creditors.

The Greek government isn't making that political process any easier for itself. Prime Minister Alexis Tsipras told parliament Monday night that he expected "an honorable compromise" from creditors but would not cross certain "red lines," including labor market reforms, which he claims would be recessionary.

But most economists, not to mention Greece's creditors, think those reforms are essential for growing the economy. Governments in other periphery countries made hard decisions and are now reaping the benefits. Spain's government met a European Commission budget deficit target for the first time in 2014 and also saw its economy grow 1.4% last year, its first expansion since 2008.

Questions about moral hazard among the Club Med countries have dogged the recent discussions about Greece. If creditors and eurozone officials relax the rules for one country, the argument goes, others will want similar treatment. But Laurenti thinks countries that made hard choices will throw their lot in with the eurozone, not Greece.

"Spain took the pain, Portugal took the pain, there is no reason Greece should take a pass," he said. "This idea that the PIGS would be a unified front falls apart.

In fact, economic green shoots are emerging across Europe, not just in the hardest-hit countries. The eurozone jobless rate ticked down to 11.3% in February, inflation has likely stopped falling, and economic sentiment surged to its highest since 2011, the European Commission said Monday.

That's another bargaining chip for the eurozone in negotiations with Greece, Kirkegaard said.

QE Undercuts Greek Case

"The argument that if we default it will bring down everyone, that doesn't apply," Kirkegaard said. "The fact that we're now in a cyclical recovery as QE is unfolding is very detrimental to the Greek government. They have much less leverage than they would have.

And Greece's suffering goes on. Fitch Ratings on Friday slashed the country's credit rating three notches to CCC, writing that "the damage to investor, consumer, and depositor confidence has almost certainly derailed Greece's incipient economic recovery. The damage will take time to repair even if prospects for a successful program completion improve over the coming days or weeks. We have revised down our growth forecast significantly to 0.5% this year ... with risks to growth on the downside.

So Much For A Surplus

Tsipras previously won a concession that Greece needs to run a budget surplus excluding interest payments of just 1.5%, down from creditors' prior demand for a 3% primary surplus. But with the economy in a freeze and tax collections even worse than usual, that 1.5% may be impossible.

There are other downside risks from the damage done by endless bickering, analysts say. The Tsipras government will engage in "a lot of defiant rhetoric to hide the fact that they are slowly and surely bending to the eurozone's demands," Kirkegaard said. But once that about-face happens, eurozone and other creditors will merely "drip-feed" Greece enough funding to avert a default, he said.

"This is unfortunately the basic outcome of the lack of trust between the government and the eurozone," Kirkegaard said.