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Saturday, February 18, 2012 8:32 PM


Germany Draws Up Plans for Greece to Leave Euro; Athens Rehearses the Nightmare of Default; Merkel's Denial Rings Hollow


It's been crystal clear for weeks, if not much longer, that Germany has been actively seeking to persuade Greece to abandon the Euro.

Confirmation came on February 7 with Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote .

Note carefully how the "I"s are being dotted and the "T"s crossed. The ECB refuses to take a haircut on its Greek bond holding so now we have this last-minute debt swap to bail out the ECB right before the rug is pulled.

My friend Pater Tenebrarum had an excellent writeup on the debt swap in Credit Market Watch – ECB To Participate in Greek Debt Exchange.

Pieces of the Puzzle are In Place

  1. Greek CDS contracts are down to a mere $2.8 billion
  2. Merkel's "Official Denial"
  3. German Finance minister places numerous roadblocks on Greece accepting the next bailout
  4. A Debt Sawp will enable the ECB to be made whole (at the expense of German and French taxpayers of course)
  5. Dress Rehearsal

The Financial Times discusses the dress rehearsal in Athens rehearses the nightmare of default
On Friday afternoon, Constantine Michalos, president of the Athens chamber of commerce, sat in his office – around the corner from where protesters were hurling chunks of marble at riot police – and contemplated what was once unthinkable: that Greece would default on its debt and then be forced into a messy exit from the euro.

“All hell would break loose,” Mr Michalos said, sketching a society that would quickly run short of fuel, food, medicine and necessities. “You would have social upheaval.”

On Monday, eurozone finance ministers gather in Brussels to consider a €130bn bail-out that Greece counts on to avoid such a scenario.
What's likely early next week is a debt swap in which the ECB gets new bonds guaranteed in Euros, then immediately transferred to the EFSF making the ECB whole. Some relatively short time later, the Troika will refuse to lend more money to Greece forcing Greece to go back on the Drachma.

Germany Draws Up Plans for Greece to Leave Euro

Let's now get to the heart of the matter. The Telegraph reports Germany Draws Up Plans for Greece to Leave Euro
The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.

Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country's finances in order.

But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.

His pessimism has been tipped into despair with a secret European Commission, Central and IMF report that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120 per cent of GDP by 2020.

"The idea instead is that the Greek government should officially declare itself bankrupt and begin negotiating an even bigger cut with its creditors. For Schäuble, it is more a question of when, not if."

The German finance minister's comments are certain to plunge the authorities in Athens into even deeper gloom. On Saturday they tried to sound optimistic, with a cabinet meeting to thrash out the final details of an austerity package.

With Greek morale at rock bottom, the national mood darkened yet further after armed thieves looted a museum on Friday in Olympia, birthplace of the Olympic Games, and stole bronze and pottery artifacts - just weeks after the country's National Gallery was burgled.

One Greek newspaper suggested the state could no longer properly look after the nation's immense cultural heritage. "The Greek state has gone bankrupt, let's face it," the conservative daily Kathimerini said in an editorial.

Mr Schäuble maintains that since Greece is already regarded by the financial world as bankrupt, a formal bankruptcy would have no negative consequences for other euro members.
Merkel's Denial Rings Hollow

I side with Schäuble. Moreover, I do not believe Merkel is sincere when she says "Greece going bust could cause a shock wave that buries other countries - with Spain and Italy among them".

Rather, Merkel simply does not want to be the scapegoat, preferring to make it look like this was Greece's choice, not hers. She will be a hero in Germany when Greece leaves the Euro, in spite of her façade, pretending she does not want that to happen.

The irony is shock waves will indeed come later when Portugal and Spain exit the Euro, given that all the bureaucrats still think "Greece is unique".  In reality, the Euro is a failed idea with too many structural flaws to paper over.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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