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Thursday, February 19, 2015 2:17 PM

Head-On Collision: Germany Rejects Greece "Trojan Horse"; Slovakia Rules Out Further Aid

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Today the eurogroup finance ministers rejected Syriza's request for a bridge loan to work things out.

Germany upped the ante, calling Greece's Letter Requesting Extra Time a "Trojan Horse" and instead demanded a three sentence letter accepting all Trioika demands.

  1. Official request for an extension
  2. Promise to complete the current programme
  3. Commit to negotiating any changes with bailout monitors

I have a simple question: What's left to negotiate other than how big a capital surplus Greece must have and for how long.

And those, Germany wants a Greek capital account surplus of 3.5% this year, and 4.5% next year and the following years.

Athens wants 1.5%. Any room for serious negotiation here?

I rather doubt it.

Head on Collision

Media still clings to hope that a collision can be avoided. For example, the Financial Times headline reads German and Greek Ministers Set to Collide.
Athens’ chances of finding itself without an EU financial backstop in one week will come down to a bitter face-off in Brussels on Friday between the Greek and German finance ministers after Berlin rejected Greece’s request to extend its €172bn rescue by six months.

The German rebuff came just hours after Yanis Varoufakis, the Greek finance minister, reversed his government’s long-held promise to kill the current bailout by submitting a letter to his fellow ministers formally requesting the additional time and vowing to bring the programme to a “successful conclusion”.

Berlin told counterparts [the letter] amounted to “a Trojan horse” designed by Athens to change the conditions it must meet to receive €7.2bn in aid available for finishing the bailout.

“The letter from Athens is not a substantive proposal for a solution,” said Martin Jäger, spokesman for the German finance ministry. “In truth, it aims at bridge financing without fulfilling the demands of the programme.”

Germany took an even harder line in a pre-eurogroup meeting of finance ministry deputies on Thursday, calling on Athens to submit no more than a three-sentence letter requesting the extension, promising to complete the programme, and committing to negotiating any changes with bailout monitors.

In addition, the official said Berlin wanted to take back €10.9bn in bailout funds sitting unused in Greece’s bank bailout facility — money some EU officials believe could be needed if its financial institutions further weakened.

One person briefed on the talks said an earlier version of the Greek letter was more in line with German demands to agree to all aspects of the current bailout, with limited “flexibility” to negotiate its terms once an extension deal was signed, before it was hardened in Athens.

But the Greek government said it would not revise its letter, arguing the eurogroup had just two choices: accept or reject the Greek request. “This will show who wants to find a solution and who doesn’t,” a Greek official said.

In his maiden address to parliament as prime minister two weeks ago, Alexis Tsipras vowed not to accept an extension of the bailout, insisting the new government was elected to end its economic and financial strictures, which already makes Mr Varoufakis’s letter a significant U-turn even without further concessions.

A two-thirds majority of the governing council’s 21 voting members would be needed to end the ELA — which would in effect force Greece to adopt capital controls or quit the currency area.

Germany’s rejection of the Greek request cut short a market rally in Greece that had pushed short-term borrowing costs close to a month-low.

Yields surged back up above 17 per cent while shares on the Athens stock exchange slid 5.5 per cent in early afternoon trading.

However, market commentators say that even if Athens does not meet its obligations and leaves the eurozone, contagion will be limited.
Slovakia Rules Out Further Financial Aid for Greece

Recall that eurozone rule changes require every country to agree. Right now it is 18-1 against Greece, with Germany leading the nay-sayers.

But it's not just Germany. For example, Slovakia rules out further financial aid for Greece.
Slovakia’s prime minister [Robert Fico] has vowed to oppose Athens’ push to ease the terms of its bailout, and warned that Bratislava was “calm” about a possible Greek exit from the eurozone if the country refused to honour its commitments.

This is a red line for us. It would be impossible to explain to the public that ‘poor’ Slovakia . . . should compensate Greece,” Mr Fico told the Financial Times in an interview in his office on Thursday. “To explain to people that we have to give money to Greece for their salaries and pensions? Impossible. Impossible.”

While Germany is frequently portrayed as the biggest obstacle to Greece’s new leftwing government, Slovakia’s hard line is a reminder that Berlin is hardly alone. Officials involved in the talks said Slovakia has been one of the toughest opponents of relaxing the rules governing Greece’s loans.

“The [previous] Greek government has agreed to the conditions of financial assistance,” said Mr Fico. “It is not possible that a new government comes and immediately declares that, er, well, we will not respect this.

Mr Fico, who has strongly criticised austerity measures imposed on his own country, said he would only accept concrete promises from Athens that ensure it “will behave in a way that will guarantee that in 10, 15, 20 years, Greece will be able to pay [back] what they get”.
Red Lines and Contagion

Excuse me for pointing out the obvious, but governments change agreements all the time. No law is permanent. Even the constitution can be changed, although it's purposely difficult to do so.

As for Slovakia not wanting to give money to Greece. It's going to happen one way or another, unless Slovakia acts like Greece.

  • Slovokia's portion of EFSF guarantees is €1.5 billion. It's total exposure to Greece is €2.2 billion. That's not much, but it is a lot to Slovakia.
  • Spain's exposure to EFSF guarantees is €18.1 billion. Spain's total exposure to Greece is €32.7 billion.
  • Germany's exposure to EFSF guarantees is €41.3 billion. Germany's total exposure to Greece is €72.7 billion.

For more country-specific details, please see Greece Has Less Than One Week of Cash; Another DOA Proposal Discussed Thursday; Exceptional Game Playing.

The idea that all of this is ring-fenced and will not matter is simply preposterous. One way or another, Germany, Greece, Spain, Italy, and in fact all 18 remaining eurozone states will pick up a portion of Grexit.

All that remains is when will that be recognized. I suggest there is no time better than now.

The Game All Along

It is in the best interest of Greece to let Germany force it out of the eurozone, especially if Germany takes the blame.

I proposed long ago that may have been Syriza's game all along!

No politician wants to take the blame when things go bad. And in that regard, Syriza has played a perfect game, bending a bit, but receiving no meaningful concessions from Germany.

Syriza has the support of its people. Germany, not Alexis Tsipras will take the initial blame should Grexit occur.

Mike "Mish" Shedlock

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