Yet Another Make-Or-Break Week For Europe
Nobody expects Greece to default on its debt and leave the eurozone. But Greek leaders do seem to be squeezing as much drama as possible from the bailout process:
(Reuters) - Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.
Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms.
Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October.
"There was a very clear message that was conveyed from all participants of the teleconference ... to the Greeks that enough is enough," one euro zone official said. "There is a great sense of frustration that they are dragging their feet.
"They should get their act together and start talking honestly, decisively and speedily with the Troika on the aspects of the programme that remain to be finalized - on fiscal and labor market reforms," the official said.
The Troika are the representatives of the European Commission, the European Central Bank and the International Monetary Fund, who have prepared a Greek debt sustainability analysis on which the second financing programme will be based. "The main issue is the lack of reform, or prior action, in Greece," a second euro zone official said.
Euro zone ministers were also dissatisfied with Greek Finance Minister Evangelos Venizelos because they believed the minister was paying more attention to his position within his party ahead of the April elections, than to talks about reforms.
"There is a great sense of frustration with Minister Venizelos, who is very hard to get hold of because he is very busy campaigning for the leadership of (the Greek party) PASOK, so he is not available to meet with Troika members," the first official said.
"He is preparing his own political future, rather than the future of his country. People are seriously disgruntled about that and have conveyed this very clearly to him this afternoon," the official said.
Recordings of these conference calls would be instant YouTube hits.
And with all the threats flying around you'd think that Greece would have long since been cowed into submission and forced to accept German control over its budget in return for credit it needs to cover its short-term debts. That they're holding out implies that they're really not that worried and believe they can get better terms, which in this case means smaller cuts in domestic spending, less of a decline in local wages, and more cash from the ECB. They're probably right.
Over the past few months major brokerage houses have been churning out reports on what would happen if Greece or another eurozone country leaves the currency union and reverts to its old money. And without exception the predictions are apocalyptic. Here's a general scenario:
Greece can't come to terms with the IMF, ECB, Germany, et al, and announces that it's leaving the euro and returning to the drachma. Instantly, everyone with a Greek bank account empties it and moves the proceeds out of the country. Greek banks close, oil imports stop, the national health ministry runs out of pharmaceuticals, etc., etc. Chaos leads to depression and, probably, to some sort of authoritarian government.
So far, this sounds like Greece's problem, and a damn good reason to accept a bailout on pretty much any terms. But what happens next changes everything. The minute Greece announces that it's leaving, investors instantly start looking around for the next domino, decide that pretty much all the PIIGS countries qualify, and pull money out of their banks, causing them to collapse and sending those economies into free-fall.
Then, since French and German banks have lent hundreds of billions of euros to those now-bankrupt countries, and are on the hook for untold trillions of credit default and currency swaps, they fail as well. The entire continent is plunged into chaos, with no obvious exit. The eurozone dissolves, all because one tiny country decides to leave.
Greece, of course, has read these reports and understands the its own power -- and knows that Europe's leaders understand it too. So the Greek finance minister spending his time campaigning rather than waiting by the phone for yet another conference call should be seen as a classic bargaining tactic. Like George Bush Sr. going on vacation as the first Gulf War ramped up, he's saying that he's not worried, that this is the other guy's problem and that by the time he gets back to the office the other guy should have some nice answers waiting.
Given the stakes, expect a deal more to Greece's liking next week.
But of course a Greek deal is the beginning, not the end. Before the signatures dry, Portugal will demand the same bailout, using the same end-of-the-world scenario as its bargaining chip. It will get what it wants, and then Ireland will step up to the table.
In the end, so runs the analyst consensus, the only alternative will be a "fiscal union" where Germany and a handful of other core countries assume the debts of the periphery, in the same way that Washington absorbed Fannie Mae and Freddie Mac's $5 trillion of mortgage paper. The ECB meanwhile, will have no choice but to finance the whole mess by buying ten or so trillion euros of low-grade paper with newly-created currency.
The euro will fall versus the dollar, yen and yuan, which will be great for German exports and Greek tourism, but bad for the eurozone's trading partners. They'll respond with inflation of their own, and so on, as the currency war really gets going. In this scenario it's hard to see an upside limit for gold and silver.