The newsflow over the past several days was progressing much as expected: any time Greece demanded a bailout renegotiation (or termination), and an end to the Troika, Germany just said "Nein", most recently on Saturday when Merkel told Hamburger Abendblatt's "that banks and creditors had already forgiven a considerable amount of Greece's debt and that she rejected any further concessions. "There has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece's debt," Merkel told the paper, adding: "I do not envisage fresh debt cancellation." She added that "Europe will continue to show its solidarity with Greece, as with other countries hard hit by the crisis, if these countries carry out reforms and cost-saving measures."
As a reminder, the contentious topic at the heart of the latest scandal rocking Europe is that the new Greek government has said it wants to negotiate to halve the country's debt, which still amounts to more than 315 billion euros despite a debt restructuring at the start of 2012 that cut the burden by some 100 billion euros.
Of course, Germany's position has been known for a long time because despite all the posturing, Germany's interest are quite aligned with those of the ECB: because while German politicians can posture all they want about the specter of hyperinflation due to money printing, they know full well that without the ECB backstop, not only is the Deutsche Mark coming back with a bang, but Deutsche Bank, perhaps the world's TBTF bank, would promptly topple over in the process crushing the Germany economy. Which is why when it comes to Greece, Merkel's interest are identically aligned with those of the ECB, which in turn are dictated by Goldman and the rest of the banking cartel as well as the BIS/MIT diaspora.
And then something unexpected happened: the socialists came to the rescue when they voiced their support to their ideological peers in Greece. First, it was France whose finance minister said that France is "more than prepared to support Greece." And now it is Obama's turn who as the WSJ reported, has "expressed sympathy for the new Greek government as it seeks to rollback its strict bailout regime, saying there are limits to how far its European creditors can press Athens to repay its debts while restructuring the economy."
“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday.
He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.”
“More broadly, I’m concerned about growth in Europe, ” he added. He said fiscal prudence and structural changes are important in many eurozone countries, but “what we’ve learned in the U.S. experience...is that the best way to reduce deficits and to restore fiscal soundness is to grow. And when you have an economy that is in a free-fall there has to be a growth strategy and not simply the effort to squeeze more and more from a population that is hurting worse and worse.”
What he means, of course, is that it is easy to issue trillions in debt - as a reminder, under Obama total US debt has risen well over 70% in just 6 short years, rising above $18 trillion - when i) one is the reserve currency and ii) when central banks, first the Fed and then every other one, have sworn to monetize government debt across the globe, leading to 16% of global government debt trading with a negative yield. It will be the task of another president to put together the pieces of this unprecedented debt splurge when one day, inevitably, the USD no longer is the world reserve or, inevitably, when first then another, then all central banks lose credibility, and instead of bonds trading with negative yields, said yields hit positive infinity once the long deferred hyperinflation finally strikes.
Lessons in economics and finance aside, what the president who in early March 2009 was impressed by the low, low "profit and earning ratios" of the S&P just said, is that suddenly not only France, but the US itself is not only giving Europe, i.e., Germany, lessons on how to handle its "fiscal prudence", but to also concede to Greek demands, something which the new Greek parliament will promptly leverage on and use for further political gains.
And where it gets truly interesting is that as Bloomberg reported earlier, not only is France also on board with "alleviating" Greek debt - a word which is extremely flexible in a diplomatic context - as we noted earlier, but none other than Matthieu Pigasse, the head of Lazard’s Paris office who has advised Greece in the past and who was hired over the weekend to advise the Greek government on its next round of debt reductions, just admitted to Bloomberg TV something startling:
“There is a range of possible solutions: extending the maturities, lowering interests rates, and the much more radical solution, the haircut. If we could cut the debt by 50 percent” he said, “it would allow Greece to return to a reasonable debt to GDP ratio.”
And just like that the "bogey" for the Greek debt haircut has been set, and at this point it is only a matter of finding where the bid and ask of the two negotiating parties end up crossing several days, or hours before the clock strikes midnight on February 28.
The only question is what happens to the ECB holdings of Greek debt which will inevitably get impaired in even a modest debt restructuring. There is of course the private-sector route: give the ECB and/or Troika a part of the post-petition equity of Greece in exchange for their impaired debt. After all they already controll all of it everywhere but on paper. Why not just formalize it. And after all, if Greece is set on never exiting the Eurozone as even the current government has implied, it may as well sell some equity to the ECB or any other interested party and just make it official.