Greece's creditors need a wake-up call

Power is an amorphous thing. The power to compel an adversary to concede is never absolute but is rather the result of assessing one's own capabilities ― and the resources of one's opponent to resist. Power asserted without the ability to enforce one's actions quickly dissipates. Similarly, fearfulness and fatalism on the part of one party can make its antagonist appear far more powerful than it really is.

Demonstrators are shown during a rally in Athens, Greece, June 29, 2015.
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Demonstrators are shown during a rally in Athens, Greece, June 29, 2015.

Such is the situation between Greece and its creditors in the rest of the euro zone. The declaration recently that the Syriza-led government of Greece intends to poll its population to clearly discover what political resources it has to resist the diktats of its fellows in the highly flawed European Economic and Monetary Union (EMU), is a bold exercise of political gamesmanship that will likely determine where the true power really lies in the tragedy that has become Greece.

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It is important not to confuse power (especially in any exercise of realpolitik) with righteousness. And in the Greek drama, there is blame enough to go around. The economy of Greece is highly inefficient, often corrupt and overly dependent on its public sector to employ and support its people. The willingness of pre-crisis Greek governments to borrow enormous sums to fund that system, and hide a significant portion of its net borrowing from view, is contemptible.

The northern Europeans, on the other hand, were outright enablers of Greek excess. Not only did they aggressively seek to provide loans to Greece during the bubble era (through their private banking sectors and the bond markets), but in what can only be seen historically as a panicked response to preserve the euro system, the euro group (through the European Central Bank and its individual country central banks), together with the International Monetary Fund, bailed out European banks and the bond market by socializing Greece's bad debt and placing taxpayers throughout the euro zone at risk of sharing the losses thereon.

Why would the banks and bond buyers of northern Europe have lent money to Greece in the first place? Or, for that matter, to housing speculators in Spain, to banks in Ireland or to the governments of Italy and Portugal?

The answer is that the structure of the incomplete European monetary union gave them strong incentive to do so. After all, with substantial excess wealth and a resistance to inflating their own economies through internal spending, the euro regime itself encouraged trade-surplus countries such as Germany and the Netherlands to lend to their weaker brethren in order to bolster the peripheral countries' ability to import even more of the surplus nations' production (to the increasing benefit of the latter and the eventual implosion of the former). And they were able to do so in a common currency, without the risk of currency devaluation by borrowers.

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This was mercantilism writ large and was without precedent in modern economic history, as there is no mechanism in the EMU to resolve the resulting imbalances and the captive peripheral countries had relinquished their ability to address the imbalances by adjusting exchange rates.

And yet the credit providers expected — and still expect — to get their money back.

The flip side of this debacle is that, when Greece defaults (or goes into what the IMF will almost certainly deem on this week to be "arrears," to avoid use of the "D" word), there is really not much that the IMF, the ECB and the euro group central banks can do to get their money back. And therein lies the realpolitik of the situation.

Yes, it is not unlikely that the ECB may conclude that, upon Greece's default, that country's banks are no longer solvent and are not worthy of infusions of additional euro to maintain their liquidity. And, yes, that would result in the prolonging of the bank-capital controls Greece instituted on Monday to hold onto whatever euro they have left, and likely even to the issuance by Greece of an internal (and heavily devalued) currency to permit its moribund economy some semblance of functionality.

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But none of those things will get the rest of the Europeans their money back. Moreover, as there is no provision in the treaty governing the EMU for ejecting a country from the euro zone (and certainly no basis for ejecting Greece from the European Union), further recourse is severely limited and of questionable force even if it were available.

As a result, Greece, with its back to the wall already and its economy in shambles, will suffer further until it rebuilds―but it will suffer the double-edged fate of a "debtor-in-possession," to use a U.S. bankruptcy analogy. It will no longer be making payments on its debt, and may end up disavowing some of that debt altogether, but will remain a sovereign power in possession of its internal assets and resources. And unlike a private party in bankruptcy, Greece will be operating under its own rule of law.

The move by the government of Alexis Tsipras to set this entire matter out before an electorate that only recently installed him―to find a tolerable way out of the crisis that has engulfed Greece for five years―and to do so at the last minute, is an exercise of real political force that gets to the question underpinning Greece's dispute with its creditors: What power do those seeking only the return of money have against a sovereign people who are disabled past the point of caring?

Accordingly, by Tsipras having pursued this avenue, I would not be at all surprised if the creditor nations and the IMF conclude that they don't really want to discover the answer to that question and offer a more reasonable deal. They very well should.

Commentary by Daniel Alpert, managing partner of investment bank, Westwood Capital, a fellow in economics at The Century Foundation and the author of "The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy." Alpert has 30 years of investment banking experience and heads Westwood Capital's real estate and hospitality industry practice. Follow him on Twitter @DanielAlpert.