Merkel….diminishing options

With the help of Frankfurt and Parisian sources, US contacts, and German readers of this site, The Slog has been able to put together compelling evidence of Greece being perilously close to ejection from the eurozone. Doubts in Brussels and the IMF, preparations in Berlin – and clauses in the bailout agreement – all point to a German determination to either amputate Greece, or leave the eurozone itself.

If there is a single investor left anywhere on the planet who thinks the Troika bailout of Greece was undertaken with any genuine commitment, then after reading this post, there won’t be. Late yesterday evening (GMT Sunday) I spent some time debating facts, signs and issues with The Slog’s longstanding source, the Bankfurt Maulwurf. This followed a series of  steers from Slog readers and other sources.

I turn first to the bailout agreement itself…where some startling things come to light. For starters, the EFSF (for that’s the principal in this document) is already in breach of it. Early up in the opening clauses, the stability fund undertakes touse funds from its existing budget to bail out Athens. As The Slog showed conclusively last week, this isn’t what happened: the ‘funds’ released were ECB non-cash bonds. The EFSF has yet to find a single investor anywhere to partake in the fund.

Now let’s review the get-out, rope-cutting clauses that the EFSF has awarded itself. Mainly under Clause 13 sub section 5, they include the EU being able to withdraw the whole deal at any time if:

* Events reduce the funds available to help Greece

* If the IMF decides at any time to withdraw its support

* If ‘a market disruption event occurs’. (Almost entirely unqualified)

* Any single payment doesn’t arrive in the creditors’ account on time

* Any element of the Brussels Accord isn’t fulfilled

* Any new Greek bond issuance replaces old bonds with a lower value/package offer.

* Any consituional and legal requirements in Greece have not been fufilled.

Says a Washington source in relation to the IMF stipulation:

“That was very much at the Fed’s insistence. This was always going to be Geithner’s game-ending card….instruct Lagarde to be unable to partake on the grounds of IMF articles about unlikelihood of getting repaid. The fact that he hasn’t played it suggests that the White House is ok with the Greek thing rolling over a little….but not for too long”.

That the Greeks themselves bought into these clauses further suggests they don’t really take the agreement seriously. (Venizelos is a key, named signatory, but has since resigned to campaign in the elections). But the nature of the individual get-outs is pretty stunning: how hard would it be to create a lack of funds or create a market disruption (they happen twice a day in the eurozone)?

And of course, the dog’s testicles in there remain the two I’ve been harping on from the start: fulfilment of the Accord requirements, and getting the Constitution changed  to cede some sovereignty. Greek sources confirmed at the weekend that several of these are still loose ends that have been barely addressed. At any point in the coming five days, the EFSF could raise these and pull out.

The Slog’s Bankfurt mole takes things on from there:

“Wolfgang Schäuble hoped that some of these and other clauses would stir the Greeks sufficiently to cause a rupture in the negotiations,” he asserts, “There is no doubt about this, I know it to be true. You will see the clause in there insisting that hundreds of officials may swarm all over Athens at any time and must be given a free hand. The people around Schäuble were convinced this would start a riot, but the Greeks barely blinked.”

Asked further about Schäuble’s inflammatory statements at the time, he confided, “Of course, yes, this was part of the same game, naturally he wanted to create an incident. He raised tiny points at issue constantly, and then referred to Greece as a ‘black hole’ or something similar. His aim was to make life impossible for the other side.”

What Schäuble actually said was that Greece was a “bottomless pit”, which if anything was even worse. But the intent is clear: at that time, the German finance minister was very hawkish on the amputation strategy. Later still he had the effrontery to assert that Greece should put off its elections until clearer evidence of Greek recovery was apparent. This did cause a considerable stir, but didn’t break the deal.

The Bankfurt mole again:

“What you must remember, what I have always told you, is that Germany always has a back-up plan. For a time I feared Merkel would put the country at risk, but she has been reined in since then. So these days I am more relaxed. Chancellor Merkel has chosen Germany over Greece.”

German Slog readers have pointed me at recent legislation that supports the Maulwurf’s contention. For some time now, the BundesRepublik has had a ring-fenced ‘bad bank’ leper colony, with funds set aside for disasters, and very close Government overseeing of transactions there. Angela Merkel rushed the necessary legislation through the Bundestag immediately following the first Greek bailout. Recently, however – and few if any foreign observers have spotted it – the Bundestag has also quietly upped the entire banking sector’s recapitalisation funding. Also largely unnoticed, the Berlin Finance Ministry has been extremely heavy with private banks on the subject of balance sheet reduction and deleveraging.

Then two months ago, Berlin confirmed that Germany’s private bank ‘firewall’ fund (the so-called Soffin) had been reinstated – with a budget of $625 billion. Again, while few have commented on this, I am  informed that the old legislation has been amended to allow private banks to sell any ClubMed sovereign bonds to Soffin….aka, Soffin will write off the losses on any and all debtor bonds should future events require that.

This might suggest a reason why Germany remains less than keen on boosting the EFSF/ESM firewall with German money: Germany is already adequately protected, thank you very much. On the other hand, it might also suggest a Chancellery preparing for a departure from the eurozone itself. The Maulwurf has an interesting take on this:

“I think one thing has been made clear to the Chancellor by my colleagues in the German banking community. Namely, that we cannot have a Fiskal Union or indeed a eurozone where there is both Germany and Greece. One of them has to go, and she must make her mind up about that”.

Sooner rather than later, I suspect, this issue of who is or isn’t destined for the Fiskal Union’s Promised Land is going to get bigger and bigger. But Angela Merkel  is a woman who prefers to let events develop and then see how the landscape changes. The Max Keiser site has predicted for some time now that Germany would have to exit the euro at some point: if he’s right, then the new legislation about eurobond dumping into Soffin would suggest that such a move has indeed been seriously entertained. But The Slog’s favourite Paris source doesn’t see it as a realistic option:

“Well, as you know here there has been paranoia about Berlin’s real plans for some time now. But on the whole, I would say our impression is that both Merkel and Schäuble would see the abandonment of the euro as a very retrograde step. They would much rather chop off the Greek leg than leave the [EU] Central Bank with horrendous debts after a German departure. She [Merkel] wouldn’t be trying to prop up Sarkozy if she had no intention of remaining in the eurozone. On the other hand, if Hollande wins and the Greeks elect a leftist Government which reneges on the bailout, things could change very rapidly.”

Whether or not the planned March 23rd default is still in play as an option, Washington remains edgy about the chances of a messy Greek default. Says a source there:

“The feeling here is that Geithner’s urgency and willingness to dig Draghi out of a hole [the dollar/euro swap line] made a real impression on Brussels, and even more so on the Frankfurters [German bankers]. But we still don’t know what in Hell Berlin might do, or when. The White House is nervous about things going through to the [Greek] elections [scheduled for April 29th]. My view is that the President is right to be concerned, and I’m sure he’s getting heat from Wall Street on that. Geithner is pushing hard for the creation of a controlled situation….and soon. But right now it’s up in the air.”

As I posted at the weekend, if one can be bothered, the thing to do this week is watch out for any of the seven signs I listed in that piece. This isn’t about Greece’s relatively tiny GDP, it’s about uncontrolled contagion and Barack Obama’s re-election. Bizarrely, Greek Prime Minister Lucas Papademos is quoted by the London Financial Times this morning as believing that Greece is “more than halfway along the path to economic recovery – although the fiscal consolidation process will last longer,” he said. “Positive growth rates should be achieved within less than two years”.

But then again, he used to work for Goldman Sachs. Whatever the more likely timing of Greek demise, what does seem to have emerged in German financial politics is that the eurozone choice is a stark one: either Greece goes, or Germany does. With local elections about to kick off in the BundesRepublik, one could argue that the last thing Angela Merkel needs at the moment is to chuck Greece over the side. Or, you could argue that throwing Athens to the sharks is exactly what most German voters want to see.

Things will develop sooner rather than later. Stay tuned.

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