While the Euro recovered from its stumble last week and the EU officialdom put out a round of denials of a story on Friday that Greece was considering an exit from the eurozone, the Euro tea leaf readers are still chewing over the significance of a not at all secret secret meeting over the weekend. The trigger is the fact that Greece is already on the verge of breaking the terms of its loans last year. This is hardly a surprise; austerity does not work and the Greek debt burden was clearly unsustainable. Per the Guardian:
The eurozone’s first ever bailout of a debt-laden member country is failing and will need to be renegotiated exactly a year after the €110bn (£96bn) rescue package was agreed for Greece.
Following secret talks in Luxembourg on Friday between Athens and some of the key EU players, it emerged that Greece will not be able to meet the terms of last year’s rescue and is hoping to ask the eurozone for more funds.
As Britain made clear it did not want to offer any more support for Greece as part of an EU package or a bilateral loan, investors remain unconvinced of the ability of Athens to sustain its €340bn debt load.
So the solution, per a Financial Times report, is…yet another bailout:
European officials are preparing to revamp Greece’s bail-out package after concluding that Athens would be unable to raise money in the markets early next year, as envisaged under a €110bn ($158bn) rescue plan.
Eurozone ministers this weekend publicly acknowledged that Greece would probably need additional cash from the European Union or other international institutions…
Greece needs to raise €25bn-€30bn next year to meet debt repayments that would not be covered by its current bail-out loan. In addition to selling bonds to the EU rescue fund, Athens could also propose a voluntary extension of maturities on debt due to expire next year, a Greek official said.
Now these reports suggest that no conclusion has been reached, merely that there is a some recognition that Greece is going from bad to worse and Something Must Be Done. In a message circulated by e-mail, Yanis Varoufakis argued that the rumor in Der Spiegel of a possible Greece departure from the Eurozone was merely to elevate the seriousness of the discussion:
The Spiegel article was meant as a salvo that would sound long delayed alarm bells. It was intended to raise a small storm of panic as a means of reminding Mrs Merkel that the crisis so far is akin to a tea party when compared to that which will follow if she continues to live in lies and to deny basic truths.
If I am right, who sent this message? Der Spiegel would never act by itself and without coordinating with powerful German policy makers. My sources tell me that these circles are mainly located within the German Finance Ministry and, to a lesser extent, in one or two of the larger banks. In association with Der Spiegel they have been sending tamer messages along similar lines for a while, namely that the Greek debt is not sustainable under the present policy mix (see FTAlphaville’s account of that series of messages utilising Der Spiegel as the main conduit).
Having lost patience, once their signals were largely ignored, Germany’s Finance Ministry’s ‘people’ must have decided to employ the big guns of yesterday’s signal. They took a partial truth (that the Greek PM had looked at the potential costs of a Greek exit from the euro), amplified it by omitting to mention all the other scenaria which were considered and, hey presto, a small tempest was unleashed on Europe’s leadership. All they then did was to watch the panic perform its miracle. What miracle? Concentrating the mind of Mrs Merkel, Mr Papandreou and assorted ministers on the importance of living, for once, in truth.
More precisely, the message sent by the Spiegel incendiary article was that the policy of fresh expensive loans for insolvent states, combined with savage austerity at a time of deep recession, does not and will not work. That the time for debt restructuring for the eurozone’s stressed periphery has come, as has the time for a rational resolution of Europe’s banking crisis. To drive their point home, the circles within Germany that saw to it that Spiegel publishes this article illustrated vividly, for Mrs Merkel’s and Mr Papandreou’s benefit, that there is something far, far worse than a debt restructure: the commencement of a successive elimination of countries from the eurozone that will give rise to magnificent levels of speculation in the money markets as to who comes next and when.
By causing a mild, early panic, along these lines, they sent the stark message that the time for lies is over, that more liquidity to insolvent states and bankrupted banks will make things worse, that it is time to have the debate we ought to have had more than a year ago in Europe.
There are several problems with this theory. The Greeks have already missed their budget targets. They also see that the Portuguese got a better deal, the Irish are starting to saber rattle too. The Germans are divided in two factions, one that would actually like to see Greece gone in the Finance Ministry versus Schaeuble and his allies. In other words, the idea that this is a German Finance Ministry feint is disputed by my sources, and the Greeks have every reason to encourage this line of thinking as long as its top officials keep issuing pious denials.
As the Financial Times’ Wolfgang Munchau observes,
The reason for the frantic diplomatic activity is that the eurozone is running out of easy options for dealing with Greek debt. There are valid objections to every proposal. An exit is too risky. A haircut – a loss for creditors on the outstanding principal – would kill the country’s banking system and land the European Central Bank with losses approaching €100bn. A voluntary restructuring would not do enough to reduce the net present value of Athens’ debt to a sustainable level.
I understand collateralised lending – swapping old Greek bonds into new collateralised debt at a discount – has also been discussed. This would subordinate every Greek bondholder, including of course the ECB. The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin. This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a eurozone bond.
The problem with these debates is that they are getting close to the zero or negative sum game point. Austerity is politically popular in creditor nations – gotta make those profligate borrowers wear those hairshirts – but are terribly policy. They only make the debt burden worse, and are really and extend and pretend strategy for the Eurobanks holding periphery country debt, in particular the Landesbanken. Germany refuses to see that its export strategy is an integral part of the problem: it can’t keep running big trade surpluses with the rest of Europe and not expect debt defaults or restructuring. But if positions start to harden, this looks more and more like a game of chicken, and Lehman showed us how well those work out when the stakes are high.