DAX Crashes After Germany Warns Greek Bailout "Insufficient"

With the Greek bailout deal now nearly done, all that stands in the way of disbursal is the Greek parliamnent and a predictably incalcitrant Germany which, according to Bild (citing EU sources) has now determined that the new bailout plan is "insufficient." Lawmakers reportedly want "immediate answers" to three questions. Here's the summary, via Bloomberg:

  • German govt sees agreement between creditors and Greek govt on 3rd bailout as insufficient, Germany’s Bild-Zeitung reports, citing EU officials it doesn’t name and written Finance Ministry analysis.
  • Germany sees open questions regarding participation of IMF, debt sustainability and privatizations
  • Implementation of many measures not foreseen before October or November
  • “Some very important measures are not yet implemented and are not specified”
  • Three basic questions must be answered immediately:
    • Whether IMF agreed to all terms of bailout completely
    • Whether debt sustainability can be secured although debt relief is planned to take place only later
    • Whether independent privatization fund can start work quickly and could take over Greek banks
  • Analysis criticizes that agreement falls short of almost all decisions taken by special euro region summit in July

And meanwhile, German 2-year yields have collapsed to record lows:


And The DAX is getting hammered...


... in fact, German stocks are now down -6% in the last two days, their biggest two-day fall in 4 years! The reason: German exporters are very focused on Chinese demand, and with a devaluation in the CNY, it means far less profits for Germany's most important economic and financial sector. In fact, it is for the sake of German exporters why the Euro exists in the first place.

For those interested in the full Greek tragicomedy update, read on:

On Tuesday, in "Third Time’s The Charm? Greece Agrees To Bailout Amid Rampant Skepticism," we argued that although formal discussions between Greek officials and creditors’ on-the-ground technical teams look to have concluded "successfully" (whatever that means in the context of Greece), there’s still quite a bit of political wrangling ahead if Athens hopes to use a portion of the new bailout funds to make a €3.2 billion payment to the ECB next week. 

As absurd as the ECB “deadline” is - this is all just one circular funding scheme - it’s perceptually important. That is, the ECB can’t afford to be seen as supportive of the Greek banking system via ELA if Athens defaults on its SMP debt. Additionally, Greek banks desperately need to be recapitalized, and because €10 billion we be funneled immediately to the banking sector once the ESM program is formally in place, Athens isn’t keen on being patient. 

Here are the details of the bank recapitalization effort as outlined in the bailout proposal (via Bloomberg):

  • EU25b buffer for Greek banks available under bailout deal to address bank recapitalization needs of viable banks, resolution costs of non-viable banks
  • Following assessment of 4 systemic banks’ capital needs by ECB and submission of capital plans, remaining identified capital shortfalls will be addressed fully by end-2015 latest
  • Law relating to govt guarantees on deferred tax assets will be amended to minimize funding
  • Additional measures and actions may be needed in the future to resolve NPLs issue
  • Bank of Greece will deliver report on segmentation of NPLs on banks’ balance sheets and assessment of banks’ capacity to deal with each segment by end-Oct.
  • Greece must establish judicial framework for corporate and household insolvency, establishing of Credit and Wealth Bureau as independent authority, amending the out-of-court workout law, fully operationalize specialist chambers for corporate insolvency within courts by end-Nov.
  • Greece must introduce coordination mechanisms to deal with debtors with large public and private debt by end-Dec
  • Bank of Greece to agree with banks on operational targets for NPL resolution, creation of joint ventures by end-Feb. 2016
  • Banks will report quarterly from June 2016 to the BoG against key performance indicators
  • By end-March 2016, Bank of Greece will revise Code of Conduct for debt restructuring guidelines to deal with groups of borrowers
  • Greece has by end-June 2016 to assess effectiveness of insolvency legal and institutional framework and introduce any necessary amendments

But as the German finance ministry made clear on Tuesday, this can’t "just be about Aug. 20 and an installment payment, but really about how, together with the Greeks, we can have a lasting solution for Greece."

Of course any “lasting solution” will have to include debt writedowns and the IMF has wavered on whether the Fund will be willing to participate in the absence of debt relief. We got some indication on Wednesday as to what a compromise between Berlin and the IMF might look like on this. Here’s Reuters, summing up the original report in Die Zeit: 

The German government is looking at whether the European Union could provide guarantees for Greek debt to the International Monetary Fund (IMF) in order to keep the Fund on board and avoid the need for major debt relief, German weekly Die Zeit reported.


Without citing its sources, the paper reported on Wednesday that the idea meant that "if Greece ran out of money, the Europeans would jump in and the IMF would suffer no losses. In return, the Fund would no longer demand extensive debt relief."


The plan would thus fulfil two key demands made by German Chancellor Angela Merkel - keeping the IMF involved and avoiding a debt writedown.

So in order to avoid having to writedown a portion of its Greek debt, Germany will effectively guarantee all Greek debt. The part that's unspoken here is that Germany would rather guarantee the entirety of the IMF's contribution than risk emboldening Podemos (the party that some liken to a Spanish Syriza) ahead of general elections due before the end of the year. Substituting a guarantee for debt writedowns would presumably disabuse Podemos of the idea that debt relief is possible. 

This "rumor" was promptly denied:


Meanwhile, German Chancelor Angela Merkel reportedly told Greek PM Alexis Tsipras that she would prefer it if Greece were to apply for a bridge loan from the remainder of the funds in the EFSM rather than rush into the ESM program. Here's Bloomberg:

Merkel discussed Greece on Tuesday with Francois Hollande of France and commission head Jean-Claude Juncker, as well as with Tsipras. Greek television cited unnamed Greek officials as saying that Merkel also spoke with Tsipras on Monday evening, telling him she would rather he asked for a bridge loan. Her office confirmed the call though refused to discuss its content.


Pressure is building on Merkel after 60 lawmakers from her caucus voted against opening bailout talks with Greece last month. Having survived that revolt, party leaders want to avoid another situation in which members are again summoned back from their summer recess at short notice to prevent a Greek bankruptcy without adequate information on which to base their vote, the two officials said.

But the bridge loan would require the backing of non-euro countries, which proved politically difficult last month, meaning that German lawmakers' vacation plans will in all likelihood have to be interrupted in order to rush the new bailout through the political approval process. As for Greece, the 400-page bailout agreement has been submitted to parliament and lawmakers are expected to vote on the deal by the end of the week. 

In the end, this will likely all be for nothing, because as we've said before and as Capital Economics told AFP this week, "the extremely optimistic economic and fiscal projections underlying the plan suggest that it might not last for very long."