Germany, Greece Quietly Prepare For "Plan D"
For several weeks now we have been warning that while the conventional wisdom is that Europe will never let Greece slide into default, Germany has been quietly preparing for just that. This culminated on Friday when the schism between Merkel, who is of the persuasion that Greece should remain in the Eurozone, and her Finmin, Wolfgang "Dr. Strangle Schauble" Schauble, who isn't, made Goldman Sachs itself observe that there is: "Growing dissent between Chancellor Merkel and finance minister Schäuble regarding Greece." We now learn, courtesy of the Telegraph's Bruno Waterfield, that Germany is far deeper in Greece insolvency preparations than conventional wisdom thought possible (if not Zero Hedge, where we have been actively warning for over two weeks that Germany is perfectly eager and ready to roll the dice on a Greek default). Yet it is not only Germany that is getting ready for the inevitable. So is Greece.
From the Telegraph: "The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country's finances in order. But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them." Funny - it is as if Schauble almost knows that any self-respecting country would tell Germany to go to hell. Then again, this is Greece, whose puppet government is one which only answers to banker demands. And we hardly have to remind readers that of every dollar in bailout cash, Greece only sees 19 cents of it. Then again this is Greece, which is full of sound and fury for a day or two, then is happy to pick up the bar of vaseline for the next 6 months until the cycle repeats anew.
"The idea instead is that the Greek government should officially declare itself bankrupt and begin negotiating an even bigger cut with its creditors. For Schäuble, it is more a question of when, not if."
The German finance minister's comments are certain to plunge the authorities in Athens into even deeper gloom. On Saturday they tried to sound optimistic, with a cabinet meeting to thrash out the final details of an austerity package.
The cuts, including a reduction in the minimum wage, mass redundancies within the public sector, and a slashing of the health and defence budgets, sparked rage on the streets of Athens last week, with buildings set on fire amid angry protests.
But the country's politicians are resolutely trying to sound upbeat. "The Greek people have done everything they can and we are determined to make good on our commitments," said Christos Papoutsis, public order minister.
Adding insult to injury...
With Greek morale at rock bottom, the national mood darkened yet further after armed thieves looted a museum on Friday in Olympia, birthplace of the Olympic Games, and stole bronze and pottery artefacts - just weeks after the country's National Gallery was burgled.
One Greek newspaper suggested the state could no longer properly look after the nation's immense cultural heritage. "The Greek state has gone bankrupt, let's face it," the conservative daily Kathimerini said in an editorial.
"If the state cannot guard the country's great cultural heritage for financial or other reasons it must find other ways to do it."
Mr Schäuble's pessimism will not be welcomed in Athens. The hugely influential German politician's doubts have been growing for several weeks, and prompted angry exchanges when Greece accused Germany of trying to drive it out of the euro.
His scepticism is not yet fully shared by Angela Merkel, who is said still to be determined to prevent Greece's financial collapse. "She thinks Greece going bust could cause a shock wave that buries other countries - with Spain and Italy among them. It could break apart the entire monetary union," said an official.
But it has support from Austria and Finland - holding the prospect that a eurozone meeting tomorrow will fail to agree the next set of EU-IMF payments for Greece.
And lest it be assumed that only Germany is preparing for the inevitable, here is the FT on Greece's own preparation for "Plan D":
On Friday afternoon, Constantine Michalos, president of the Athens chamber of commerce, sat in his office – around the corner from where protesters were hurling chunks of marble at riot police – and contemplated what was once unthinkable: that Greece would default on its debt and then be forced into a messy exit from the euro.
“All hell would break loose,” Mr Michalos said, sketching a society that would quickly run short of fuel, food, medicine and necessities. “You would have social upheaval.”
This week, that assumption was questioned as never before. Some officials in the Netherlands, Germany and Finland – three of the eurozone’s four remaining triple A governments – now argue that the blowback from a Greek default might not be so debilitating, after all.
“I am not advocating a Greek default, hard or soft – but I’m not excluding the possibility of it if the Greeks don’t get their acts together,” Alexander Stubb, Finland’s Europe minister, told the Financial Times.
“Europe is prepared. A hell of a lot better prepared than it was on May 9 2010 – and a hell of a lot better prepared than it was last year, so I think we’ve taken the necessary measures.”
And while anyone who is vaguely familiar with rapo banking understands that Greek bonds have been repoed in an infinitely long rehypo chain starting with purchases in the open market, and ending with the ECB, in the process leaving tens of Prime Brokers open for loss exposure, and thus a Greek default would lead to massive impairments, there are those who still think that a Greek default is manageable. It isn't.
Platon Monokroussos, research head at Eurobank EFG, believes a Greek default might even cascade into a full-blown EU exit, because government would probably try to impose capital controls, close borders and take measures that violated EU law.
Greece’s mainstream politicians appear aware of this. Lucas Papademos, the prime minister, warned MPs that the country faced “catastrophe” if it did not approve a sweeping austerity package tied to the loan.
Many in Greece realize this. But ever more dont care any more and just want out.
There is a minority – particularly on the far left – that wants out. Their chief argument, endorsed by some well-known foreign economists, is that a devalued drachma would lower wages and instantly make Greece more competitive.
They tend to point to Argentina, which broke its peg with the dollar more than a decade ago, defaulted on its foreign debt and has since fared far better than many expected.
Yet that comparison overlooks the fact that the Greek economy – unlike Argentina’s – boasts a small production base and few exporters. Most of its companies rely on imports, which would rocket in cost. Sceptical, too, are ordinary citizens. “We are not Argentina,” Mr Stournaras said. “We are not even self-sufficient in agriculture.”
Perhaps there is a reason that whatever happens on Monday will be when the US market is closed - the last thing needed is for the US momentum accentuating HFT algos, who are all that is left of the market, to take whatever trend develops, and run away with it. Or perhaps that is precisely why Europe decided to go ahead with a decision precisely on a day when the US market is closed.
Our personal sentiment is that nothing has changed: the only question on Tuesday will be when the next "drop dead" summit/meeting/shindig will be. And at what point will Greece's fate again not be sealed. Because if Reuters is correct in suggesting that someone, somewhere thinks that that the Greek exchange offer can be consummated in 3 calendar days, or one work day as the 10th and 11th are Saturday and Sunday, then the farce is already long over.
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