Last Saturday, the EU finance ministers who gathered in Brussels in a last ditch effort to keep Greece in the eurozone were forced to confront a rather inconvenient truth. A bailout for Athens would likely cost nearly €80 billion, far more than the €53 billion figure mentioned in the draft proposal submitted by Alexis Tsipras two days earlier. The revised figure included a €25 billion provision for the recapitalization of Greece’s ailing banking sector. A day earlier, we warned that the banks would need at least €10 billion and likely more - “don’t tell Merkel”, we warned.
Judging by the date on a document that began to circulate once the finance ministers began to voice their consternation at the larger figure, Germany had already assessed the possibility that the cost of a potential third program for the Greeks was likely to climb prompting the finance ministry to prepare a document outlining two alternative options for Athens. One of these options was a 5-year Greek “time-out” from the eurozone. Initially (and by “initially” we mean for perhaps a few hours after the document was first distributed) the “time-out” idea was written off as simply another manifestation of Wolfgang Schaeuble’s frustration, but by Sunday it was clear that the idea was no laughing matter - indeed, had the bloc’s sleep deprived leaders not inked a ludicrous agreement at 6am in the morning, the "soft" Grexit scenario might already be well underway.
Now that reports from both the IMF and the European Commission on Greece’s debt sustainability are public, the world is well aware that no one, anywhere, truly believes the Greeks will ever be able to return to economic prosperity if they are forced to labor under their current debt load. In short: a "re-profiling" is necessary. And while the Germans might be compelled to consider some manner of rescheduling, both Merkel and Schaeuble have made it clear that an outright "haircut" is out of the question - unless of course the Greeks would agree to, as we put it earlier this week, "get the hell out." Here’s Reuters [7]:
German Finance Minister Wolfgang Schaeuble questioned whether Greece will ever get a third bailout programme on Thursday, a day after the Greek parliament passed a package of stringent measures required to open negotiations on financial aid.
He said he would submit a request to Germany's parliament to vote on opening the talks and said passing the reforms was an "important step", but it would be hard to make Greece's debt sustainable without writing some of it off, an idea Berlin considers to be illegal.
Greece is seeking up to 86 billion euros in a third rescue package in return for tougher austerity measures and structural reforms.
"We will now see in the negotiations whether there is even a way to get to a new programme taking into account (Greece's) financing needs, which have risen incredibly," he told Deutschlandfunk radio on Thursday.
The International Monetary Fund is leading calls for a deep reduction in Greece's debt but Germany, the biggest contributor to the euro zone's bailout funds, has ruled one out.
Schaeuble, a member of the centre-right Christian Democrats, the party of Chancellor Angela Merkel where there is strong resistance to a new bailout for Greece, said such a step would not be compatible with membership of the currency union.
And more from Bloomberg [8]:
German Finance Minister Wolfgang Schaeuble says on Deutschlandfunk German radio it’s unclear how sustainability of Greek public debt can be achieved without debt forgiveness, which is banned as long as the country is a euro member.
"Many economists, including in Greece, doubt that Greece’s problems -- listen to what the International Monetary Fund is saying -- can be solved without a real haircut."
"A real haircut, that’s undisputed, is incompatible with membership in the currency union."
Temporary Greek exit from euro region may be “the better way” because it would allow haircut, provided Greece agrees to such a step
Given Greek financing needs, "we’ll see in the negotiations if there’s even a way to arrive at a program"
"I don’t know, nobody knows, at the moment how this is supposed to work without a haircut and everybody knows that a haircut is incompatible with euro membership. That’s the situation."
Yes, "that's the situation." Greece's debt is completely unsustainable and "nobody knows" how the proposed third program is "supposed to work" without an upfront haircut, which is flat out illegal. But one way it could work, Schaeuble suggests, is for Greece to pursue the "time-out" option which the FinMin apparently believes is still feasible even after Wednesday's Greek parliament vote.
Meanwhile, it's still possible the IMF walks away from the deal if Germany doesn't agree to restructure Greece's debt. Consider for instance the following comments from Christine Lagarde (via WSJ [9]):
"What I very much hope is that we can all keep to a very tight timetable and we can respond to a challenge that is colossal. I have some hope, as… I understand that there were some more positive noises toward that principle of debt restructuring out of Germany in the past few hours."
And from another “senior” IMF official:
"[The EU’s commitment to restructuring] is not very concrete [and is] somewhat weak. We have made it very clear that before we go to the board, we need a concrete and ambitious solution to this debt problem."
The irony of course is that if the IMF walks, Germany would likely walk as well, as Europe has long maintained that IMF participation is a prerequisite for a third program and the Fund is expected to contribute heavily to the new package. So in short: if Germany balks on debt relief the IMF walks, and if the IMF walks, Germany walks, which for Schaeuble means that perhaps Greece should just spare everyone the walking and walk first. "This would perhaps be the better way for Greece," the FinMin said Thursday.
