Why The Probability Of Russia Or China Bailing Out Greece Is Low

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About: Global X MSCI Greece ETF (GREK)
by: Martin Vlcek
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Summary

There is always a theoretical chance that some other country or institution will give a loan to Greece.

However, it is an unlikely outcome and the help would probably only be temporary.

Russia or China would be unlikely to keep providing money to Greece on an ongoing basis.

After analyzing the most probable scenarios in the current Greek debt drama which greatly influences the price of the Greek stock index ETF (NYSEARCA:GREK), I would like to look at one marginal scenario today in more detail.

There is a chance of some other country or institution making a loan to Greece. However, the probability of Greece finding some other rescuers is slim, in my opinion. The need to continue providing funds year after year is a very strong deterrent. Moreover, I am confident that the U.S. would not let some "unfriendly" country such as Russia or China gain influence in Europe. Perhaps even Europe would not let that happen, even if the U.S. was willing to.

How far is Greece from Crimea and ISIS?

If you look at the map, Greece's shores are in the same sea as the shores of Iran, Israel, Turkey, Syria, Egypt, and many other politically important or sensitive countries. Also, Greece's shores are awfully close to the recently annexed Crimea peninsula, being in the adjacent sea, connected by the Bosporus and Dardanelles straits between Europe and Turkey.

How far is Greece from Crimea? Roughly 1000 miles. It is roughly 1000 miles from Egypt's shores as well, and roughly 500 miles if measured from the Greek island of Crete, which hosts a significant NATO air base. Crete is also just less than 1000 miles away from the shores of Syria and Israel and just over 1000 miles from Iraq's borders and ISIS. And Greece's recent offer to NATO to build a new airbase would put NATO even closer to the shores of Crimea and ISIS regions.

The U.S. has strong interests in the Mediterranean, so it will likely not let Russia or China interfere. Europe contains many of the U.S.'s strongest allies, and Europe is a huge consumer market ripe for the U.S. multinationals to benefit from. Greek debt is small enough, and the bailout money would be literally lost in the huge U.S. and would be a drop in the sea compared to the total U.S. debt. Even IMF's budget would easily bear another Greek loan. So I am very confident the U.S. would be willing to offer more loans (through the IMF probably) to repay the current loans due in order to kick the can down the road and neutralize the Russian/Chinese influence.

China interests in the Mediterranean

China owns a part of the Piraeus port in Greece already and is looking to acquire more in the current privatization, which is indirectly a part of the debt talks. They know this is a strategic port that they will either be able to use to their great advantage economically and, more importantly, politically. Even if they are not able to use this port for other than their economic reasons, the investment is good on a stand-alone economic basis. Additionally, China can leverage the property in negotiations and trade because it will be strategically important to Russia and the U.S.

But the Chinese activity in the Mediterranean has recently not been confined to economic activities only. China concluded a small joint naval exercise with Russia in the Mediterranean just a month ago.

Supporting Greece financially would mean an expensive ongoing commitment

After staging a spectacular rise coinciding with the easy money policies and asset bubbles, Greek GDP per capita has been falling relentlessly since the 2008 financial crisis.

Source: Tradingeconomics.com

The net EU transfers to Greece have been stagnant per capita, and there is little will for more redistribution within the EU. So the percentage is unlikely to rise significantly, although the currently lower GDP level helps to capture a larger share of those EU transfers, which are based on relative GDP per capita.

Source: Money-go-round.eu

Why kicking the can is a very probable outcome at this stage

Apart from the above-mentioned arguments regarding the geopolitics, the U.S. is also interested in a stable Europe for broader economic reasons. A stable Europe means stronger Euro, which means a relatively weaker dollar and better market position for the U.S. corporations.

There are other parties that are interested in kicking the can down the road, mainly the largest debtors such as Germany. But they are not really interested in a full lasting solution because a lasting solution (debt restructuring now in exchange for Greek promises of future reforms) would take away all negating power of debtors over Greece because Greece currently has zero trust of its debtors that it will honor any past or future agreements. Hence, a small and only temporary solution is likely at this stage and not a full debt restructuring (orderly default).

Political motivations

Of course, the political and economic stakes are high for any appearance that Germany would give in to Greek demands and relieve lots of the debt (this would really open the floodgates, and other EU countries would ask for debt relief as well). Also, the right-leaning parties in Europe clearly want to punish the Marxist-friendly Syriza and prevent the rise of similarly extreme left parties elsewhere. So one of my theories is that there will be no lasting solution until Greece elects a moderate set of political parties that would promise to honor past agreements with its debtors.

And Greece has been very stubborn. The negotiations are clearly dysfunctional even at this late stage, although they have intensified. I would argue that the real negotiations where positions are nearing each other have only started a few days ago, and months have been wasted. This is in big part due to the specific personalities of the negotiators. I think the negotiating leaders and teams should have been replaced on both sides if there was a real will on both sides to find a solution.

Conclusion

A scenario in which Russia, China, or another country or institution bails out Greece is very unlikely, in my opinion. It is theoretically possible, but practical costs for the savior country would not only have to include the one-off bailout payment but also ongoing annual transfers of several billion Euros year after year. Otherwise, the debt would just keep ballooning again. It is questionable if such transfers would deliver enough value to the new rescuer to justify them, even when accounting for the geopolitical factors.

Even if such benefits truly existed for the rescuer, the benefits are higher for the current powers in the region, such as the U.S. and the EU. Therefore, it is very unlikely that the U.S. and the EU would really let an outside rescuer help Greece in any major way.

Simply kicking the can down the road again and continuing to press Greece for more reforms is a clearly superior and relatively cheap way of maintaining the geopolitical status quo as well as keeping future negotiating power vs. Greece to get further concessions for a partial debt relief.

Disclosure: I am/we are long GREK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.