Someone Told Merkel...

Earlier today, we reported that according to Frankfurter Allgemeine Sonntagszeitung, the German finance ministry had begun circulating a document which outlined two possible courses of action for dealing with the Greek 'problem.'

After reviewing the "new" proposal (and by "new" we actually mean the old proposal that 61% of Greeks voted against, plus a few cosmetic changes) submitted by Greek PM Alexis Tsipras on Thursday evening, the German finance ministry said the plan was “missing centrally important areas of reform to modernize the country and to advance on the long term economic growth and sustainable development.” 

Yes, Tsipras’ offer is "missing" important reforms, but more importantly, it seemed also to be "missing" the small detail that in addition to the €53 billion the country needs for a third sovereign bailout, Greece will also need another €10-20 billion to recapitalize the banks, something we warned about (and outlined in quite a bit of detail) on Friday in "Don't Tell Merkel: Greek Banks Need An Additional €10-14 Billion Bailout." Here's what we said yesterday:

We’re sorry to break it to Mr. Michelbach, Frau Merkel, and the German taxpayer, but that €53 billion Greece is asking for will be just the start of things and we don’t mean in the sense that Athens will one day in the not-so-distant future be back in Brussels looking for a fourth bailout (which they probably will), we mean in the sense that Greece’s beleaguered banking sector is insolvent and will need to be recapitalized one way or another with some (or all) of the funds coming directly out of the pockets of the very same EU taxpayers that are now set to fund the third Greek sovereign bailout. 

While an extra €10-14 billion would have been bad enough, it turns out that Greek banks will actually need more along the lines of €25 billion. Here’s Reuters

Euro zone finance ministers were told on Saturday that some 25 billion euros (18 billion pounds) of any bailout loan to Greece would be needed to recapitalise banks that are on the verge of collapse, sources close to the discussions said.


That is more than double the amount that Athens forfeited in financial stability funds at the end of June when it walked away from talks on completing a previous bailout programme.


The extra capital is needed because of the damage wrought by massive deposit withdrawals before a two-week bank holiday that was ordered on June 29, when Greece imposed capital controls to stop savers and businesses emptying their accounts.


Prime Minister Alexis Tsipras applied this week for a three-year loan from the European Stability Mechanism of 53.5 billion euros. EU and IMF experts who analysed Greece's funding needs concluded it would need some 74 billion euros, the sources said.


Within that sum, sources said that about 25 billion would need to be used to bolster the balance sheets of banks ravaged by a renewed economic slump and fears that Greece would drop out of the euro single currency area.

And indeed, it appears as though someone did tell Merkel the bad news, because as WSJ reports, and as we predicted over 24 hours ago, the extra funds for the bank recap were simply too much for Germany to bear: 

The document, which was first reported by German weekly Frankfurter Allgemeine Sonntagszeitung, became public after the three institutions that oversee eurozone bailouts estimated the country would need an extra €74 billion ($82.55 billion) in rescue loans over the coming three years. That high figure, which includes €25 billion to recapitalize Greek banks, drew consternation from many finance ministers during Saturday’s meeting, according to two European officials.



"The mood [is] bad," said one person describing the atmosphere in the room.


In the document, dated July 10, Germany takes a tough line on spending cuts and policy overhauls Greece submitted to its international creditors, the other eurozone countries and the International Monetary Fund late Thursday.

So it appears as though the German finance ministry had already prepared the document and upon hearing the €25 billion bank recap figure, seized upon the collective shock among EU finance ministers to distribute its ‘commentary’ on the Greek proposal. Here’s the text of the document:


The €50 billion asset transfer suggested in the document was viewed by some EU officials as proof of Yanis Varoufakis' contention that Germany is now simply trying its best to push Greece out of the euro. Once again, from WSJ:

The people familiar with the document questioned the likelihood of either of the two options working. There is no process for a temporary exit from the eurozone and it is unclear where the country would get €50 billion in assets to secure the loan.

"The 50 billion [euros] are so unrealistic that it is clear that they want the Greeks out," one of the people said.

As noted earlier, the Germans are not alone in their opposition to the Greek proposal and arguments discussions in Brussels have ended with no agreement. With the bailout figure now projected at €74 billion, and some rumors circulating that the final tally could be considerably higher, we'll leave you with the following table which should tell you something about how difficult it will be to secure across-the-board support for an ESM package of that size: