Greece's ‘Worst-Worst-Case-Scenario’

Wolf Richter's picture

By Wolf Richter

Judging from the stream of rumors and energetic denials, German bureaucrats, experts, and politicians are furiously working on dozens of projects that all deal with the debt crisis, and they go off in as many directions.

Reports surfaced today that Chancellor Angela Merkel wants to accelerate amending the Lisbon Treaty so that debt-sinner countries that can't get their budgets in order would be dealt with more harshly—through imposition of additional sanctions (just how they’d pay for these sanctions when they’re already having trouble funding their deficits hasn’t been addressed, apparently).

The Lisbon Treaty is a chef d’œuvre of the 27 members of the European Union. Negotiations started in 2001 to establish the European Constitution, which flopped in 2005 when French and Dutch voters said non and neen. A watered-down compromise treaty was worked out that everyone could agree on. But in 2008, Irish voters didn’t agree on it. Then the financial crisis hit. The Irish got scared, and when the referendum was re-run, voters changed their mind. The treaty became effective December 1, 2009, after eight years of struggle. And now, according to Reuters, Merkel wants to rush very unpopular sanctions through the system: amendments on the table by next spring and ratification by all 27 members at the end of 2012. A pipe dream.

Another report surfaced in the Spiegel. Experts at the Ministry of Finance are working on scenarios that incorporate Greece's exit from the Eurozone. The idea that not long ago was part of the official Denkverbot (prohibition to think) became official language at the G-20 after Giorgios Papandreou, prime minister of Greece, had fired his referendum bazooka into the air. And now it has transmogrified into actual scenarios.

The underlying assumption is that Greece will not implement the agreed-upon budgetary measures and economic restructuring. Such a failure would entail Greece’s exit from the Eurozone. And when that happens, the experts envision a range of scenarios, according to the Spiegel, from rather benign to, well, rough.

It starts with the basis scenario. Greece reinstitutes the drachma. After some initial chaos, the removal of the weakest country of the Eurozone might strengthen the Eurozone over time. While other countries, like Italy and Spain, would still have difficulties, they would be better able to manage their problems if the source of uncertainty is removed. Spain and Italy aren’t bankrupt, the experts claim, unlike Greece.

And further down the line is the "Worst-Case-Szenario." (I'm quoting in actual German. The quantity of English in everyday German never fails to astonish me though it can be helpful ... unless it’s not helpful, like the noun handy, which isn't a sexual act but a cell phone.) Italy and Spain would be targeted by global financial markets after Greece's exit. Their yields would rise and their financing costs would reach unsustainable levels. The EFSF, a JELL-O-like structure, would be forced to fund these two countries—but it would have to have lots of firepower, which is increasingly in doubt.

And then there is—I’m quoting again in German—the "Worst-Worst-Case-Szenario." The drachma would be dramatically devalued, which would make Greek exports more competitive and would help tourism. Germans with little money and lots of time off could go for cheap but long and gorgeous vacations.

But Greece's debt is in euros and will have to be serviced and paid back in euros, impossible with a devalued drachma. Hard currency would dry up. International capital markets would close their doors to Greece. Greek banks and companies, whose debt is in euros, would go bankrupt. Massive layoffs would follow. Consumption would collapse. And in the process, it would take down smaller countries, such as Cyprus, that are heavily exposed to Greek sovereign, corporate, and bank debt (Another Eurozone Country Bites The Dust).

Thankfully, according to the Spiegel’s government sources, the "Worst-Worst-Case-Szenario" is not the most likely.

Meanwhile, Greek teachers are lamenting their new reality. They’ve long been ridiculed in Germany for their cush jobs with long vacations, short work days, high salaries, early retirement, and lots of benefits and privileges that have been doled out by various governments as part of their vote-buying binges funded by a seemingly endless stream of borrowed euros.

But now, the cuts are here, and they're real. Salaries got cut by over 20%. Christmas bonuses got cut by 50% (wait a minute, Christmas bonuses?). But prices are about average for the Eurozone, and after tax increases, the purchasing power got slammed. Which raises the question for how much longer the population is willing to go along with these measures—and if there isn’t, as the Germans would say, a Worst-Worst-Worst-Case-Szenario waiting to play out.

When Papandreou fired his bazooka.... Greece's Extortion Racket Jumps To The Next Level.

Wolf Richter

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nahshal's picture

what is Germany says "NO"

"That's it man, bold over man, bold over! What the f**k are we gonna do now? What are we gonna do?"

jogos de meninas

boiltherich's picture

But Greece's debt is in euros and will have to be serviced and paid back in euros, impossible with a devalued drachma. Hard currency would dry up. International capital markets would close their doors to Greece. Greek banks and companies, whose debt is in euros, would go bankrupt.

This is sort of the crux of the problem isn't it?  We all know that when Greece leaves the EMU and goes back to a devaluing drachma they will simply not honor those euro denominated debts, neither the public or private sector, even if that means being kicked out of the EU itself, not only do we (more importantly the MARKETS) know it but the Troika knows it, that is why they have been kicking the can all these years.  They also know when Greece goes so goes Cyprus, and soon after the rest of the PIIGS.  Within two to four business days of the first euro exit which ever nation does go first will have triggered a cascading default across all Europe.

The tangle of who owes what to whom and how it can or even could be repaid, or the exchange values of 27 nations and their ForEx with the rest of the nations of the world mean a global catastrophe of universal competing fiat devaluations to the point where fiat itself would very quickly not be accepted by anyone.  That is, global hyperinflation that would last hours before trade would simply end.  At that point holders of PM's would be rewarded for their foresight and patience, but confiscation of all the gold and silver on the planet would simply not be enough to back either local currencies or even a universal currency like a jazzed up SDR scheme.  The global economy is simply too large to be backed by such a relatively small resource as PM's.  Unless gold were valued to the point where actual atoms of gold had currency value.  I mean, if you need a gallon of gas for your lawn mower how do you pay for that in gold when gold is worth the equivalent of $100,000 an ounce or more? 

They kicked the can because what we face, what has to eventually happen is that all human economic activity has got to be repriced and all social structures have to reform.  The debt world we live in now is at it's natural end.  But be careful, a new way of doing things is upon us but it will not be a return to a glorious old past, that ended because it no longer worked also.  TPTB are cooking up something and sure as I sit in the dark typing this none of us will like it.  Whatever it is TPTB will have their dynastic hyperwealth safe and sound with more power than ever, but it is fair to say none of them post or read here at ZH. 

kaiserhoff's picture

Worst, Worser, Worsest.  -  Damn, Reggie Middleton is contagious.


Troy Ounce's picture


Worst, worser, USDollar...

chubbar's picture

I'd say the idea that the Irish got scared because of the financial crisis and re voted FOR the compromise treaty is revisionist history at best.

The revote was announced (or at least implied) within hours of the initial DOWN vote of the treaty. In what parallel universe  does a NO vote mean we initiate a "do over" vote?

This treaty was deemed too important to leave to the voters and the vote was manipulated in whatever manner needed to ensure an UP vote. I obviously don't have any details on specific manipulation but I think the facts speak for themselves.

The same thing happened on the CAFTA vote if anyone dares to go back and look at the parlimentary manuevering and outright fraud during that vote.

AbelCatalyst's picture

Worse, worse, worse case scenario is social unrest, and major disruptions that spill over into other countries...  Greece may not be large, but I guarantee those people will be beyond pissed when their "cush" jobs they were promised go away.  They will blame the govt and take to the streets.  How will the military restore peace in full melt down?  Do other countries get involved (invade?), or is Greece left on their own to degenerate into the dark ages?  

This is not a good scenario, and I'm not sure how it can be avoided.  Printing is the only thing that will keep the peace (short term!), but even this road will lead to the same point - total melt down, social unrest, etc., etc....  


aleph0's picture

Christmas Bonuses ?
That's normal in most "Social" EU countries.

Most Germans get a 13th. Salary - half paid out in summer, the rest at Xmas.
Very common in Germany is a 13th. and even 14th. Salary

BTW, IIRC ... Germany has  600+ "State" Krankenkassen, and over 1,000 in total.
One of the biggest KK employs some 60,000+ people.

My guess is that there are probably 1 million  jobs in this segment , and all they do is Count Money coming "In" , and hand the money "Out

BTW, they get lots of perks as well, like cheap insurance ( all branches ), travel-money called "KIlometergeld" etc. etc.

Isn't Socialism Great  ! ... for the "Insiders"


disabledvet's picture

I'm not sure the euro can be devalued anymore. Basically now that the debt markets are the "risk currencies" the only thing Europe has anymore is the euro--similar to the yen but with the exact opposite of the zero percent financing. Obviously Wall Street is "chomping at the bit" for the "cash our re-fi" for say "the entire nation of Italy." The collateral doesn't come any better. Obviously you don't want to be a holder of the debt however! That crap is TOTALLY WORTHLESS. Now for the interesting question: "can i buy an entire Continent for just a few ounces of gold?" cuz there's no way The Fed's gonna allow that euro to depreciate. "They got TRILLIONS in debt to unload" baby!

Bruin4's picture

Come on.... Its the " WURST, WURST CASE SZENARIO" !!!

DaBernank's picture



FinalCollapse's picture

"Worszt Case Szenario" Bitchesz.

Peter Pan's picture

It is said, but I am still seeking confirmation, that with the exception of the IMF etc loans given to Greece recently, the rest of the bonds are issued subject to Greek law. This means that if Greece reverts to the drachma, it will be able to repay in drachmas. The problem for Greece appears to be an unconfirmed rumour that as part of the banks taking a 50% haircut, they required Greece to submit to Englsih law for the new bonds which would require them to pay back in Euro. Greece has been well and truly stuffed and now simply awaits to be baked by her European overlords.

bigkahuna's picture

I believe the Greek government suckered someone into lending them some more money. Who gives a darn who's law it is when they clearly cannot repay. This is all a big show and the theatrics may enhance the banking cartel's position, but the Greek people will be the ones who get shafted.

They will repay with a thank you/now go pound sand.

catch edge ghost's picture

Analysis, history, forecasts, auto-erotic humor.  It's a one-stop-shop when you visit the pit.

LookingWithAmazement's picture

If the ECB just buys up anything, like Bernanke, the "crisis" will soon be over. So it will go. Merry Christmas and a happy New Year. Boring world we live in.

navy62802's picture

Take the acknowledged "worst case scenario" and then imagine something considerably worse. Because that's what will probably happen, as these official worst case scenarios typically revolve around alot of wishful thinking and willful ignorance.

akak's picture

Indeed, as witnessed by the so-called "stress tests" for the TBTF banks.

akak's picture

The worst-worst-worst-case scenario:

Leo takes the helm as manager of Greek state pension plans.

"What do you mean, we're bankrupt?  We're the government --- we CAN'T go bankrupt!  Don't you know that the government is the source of all wealth in society?  Now shut up and fire up those drachma printing presses!"


(But if you first take him out to lunch, he may throw you a bone or two.)

goldfish1's picture

Former German chancellor silent on Fed memo linking him to gold suppression

Nod to zerohedge in article...

Wolf Richter's picture

Just want to add here: for an excellent discussion on the whole debacle of the ECB, the EFSF, and market reactions, check out this post and Rik’s long comment: