It has been a busy few days for Germany. In the space of a week, they have warned Greece "there will be no blackmail," adding that a Greek exit from the euro was "manageable," only to hours later deny (clarify) these comments. This was then followed up with beggars-are-choosers Syriza demanding any ECB QE must buy Greek bonds (or else) - which Germany has flatly ruled out - only to see today that Syriza is practically guaranteed to win a "decisive victory" at the forthcoming snap election. So it with a wry smile that we note Bild reports tonight that the German government is preparing for a possible Greek exit, warning of financial system collapse, bank runs, and huge costs for the rest of the EU.
Germany has been flip-flopping (as Reuters notes)...
Der Spiegel magazine reported on Saturday that Berlin considers a Greek exit almost unavoidable if Syriza wins, but believes the euro zone would be able to cope.
Vice Chancellor Sigmar Gabriel said on Sunday that Germany wants Greece to stay and there are no contingency plans to the contrary, while noting the euro zone has become far more stable in recent years.
As the euro zone's paymaster, Germany is insisting that Greece stick to austerity and not backtrack on its bailout commitments, especially as it does not want to open the door for other struggling members to relax reform efforts.
But now the rhetoric is heating up...
Germany is making contingency plans for the possible departure of Greece from the euro zone, including the impact of any run on a bank, tabloid newspaper Bild reported, citing unnamed government sources.
The newspaper said the government was running scenarios for the Jan. 25 Greek election in case of a victory by the leftwing Syriza party, which wants to cancel austerity measures and a part of the Greek debt.
In a report in the Wednesday issue of the paper, Bild said government experts were concerned about a possible bank collapse if customers storm Greek institutions to secure euro deposits in the event that Greece leaves the zone.
The European Union banking union would then have to intervene with a bailout worth billions, the paper said.
We have always argued that a Grexit would be painful for both the Eurozone and Greece, but relatively more painful for the latter. As such, it has always seemed unlikely that Greece would unilaterally seek to exit the euro. This still seems to be the case, though there have been internal shifts. As we noted in Part 1, the economic and financial contagion from a Grexit could likely now be more easily contained. This allows the Eurozone to take a harder line with Greece, not least since giving into SYRIZA, will send the message to Podemos and others that fiscal discipline etc is fair game.
So the Eurozone may be less nervous about Grexit and feel it has more reason to stick to the rules as it has laid them out, which may harden its negotiating stance. Equally though, Greece may have more reason to think a Grexit could be economically manageable, which could encourage a SYRIZA-led government to stick to its guns more firmly. This to us suggests the clash could be bigger and the negotiations more difficult this time around. Ultimately, though – with hundreds of billions of euros and the political project of the euro at stake – it still seems likely someone will blink and a fudge will be on hand as is usually the way in Europe. Allowing Greece to remain inside the euro for now.
* * *
Greek stocks were closed on Tuesday (but ETFs in the US were notably lower) as Greek bond prices tumbled...
And if Germany is 'preparing' for Grexit, then maybe its 5Y Greek CDS they are buying?
As we concluded previously, the consensus can certainly forget the ECB announcing public QE at its next monetary policy meeting on January 22, which will be followed just 3 days later by the Greek national elections. In fact, things in the coming weeks and months may get very ugly, fast depending on how things in Greece play out.
So after 3 years of kicking the can and pretending it is fixed, suddenly everything that is broken in the Eurozone threatens to float right back to the surface, leading to another showdown when photos such as this one become a daily occurrence.
The only question is whether this time anyone will believe the rhetorical "whatever it takes" threats uttered by the one central bank which for the past 4 years has proven it is utterly incapable of acting, instead chosing to talk each and every day, a strategy that has worked brilliantly, until now.