The Iron (Germany) tells the Ship (Greece) that it is not to Pass Go and Collect E130bn

The recent film, The Iron Lady recaptured Mrs Thatcher’s steadfastness to maintain tough economic policies in the face of much opposition. Today that soubriquet should be awarded to Mrs Merkel. Throughout the last two years since the euro crisis broke, Germany’s leader has consistently stuck to her beliefs that the solution to the economic problems of the periphery is that they become more German, and adopt the policies of public and private sector austerity that followed the deterioration of their budget deficit following the integration of East Germany in the early 1990s and their competitiveness problems from entering the euro at too high an exchange rate in 1999. To German minds, what is required to resolve these problems is not a quick dose of bailout money from Germany that may merely mean the problems reappear in a few years time, but years of hard work, sacrifice and belt-tightening by the countries themselves.

At first the rest of Europe went along, knowing that there was some truth to the German analysis of their problems, but also believing that were they to proclaim that they would be more German in the long term, then Germany would actually bail them out in the short term as well. In recent months, as the crisis hit Italy, Spain and Belgium, the pressures from the other Eurozone countries demanding more German assistance have been compounded by pressure from both the US and UK governments concerned that the recession in the Eurozone will drag their own economies back down into recession again. At Davos recently where the great and the good of the world economy get together to sort out the world, the overwhelming consensus was that if only Germany would offer more money, then everything could get resolved. German leaders remained unimpressed.

In recent weeks, it has been very noticeable how many comments there have been in the press from German officials indicating that essentially Greece is bust and a major default of its debt is inevitable. To date Germany has actually put up very little cash to bail out the crisis-hit countries, however March 20 marks the due date for repayment of a large Greek bond, money that Greece does not have unless the second round E130 bn bailout plan initially agreed last summer is confirmed. Were that bailout not to proceed, Germany would save itself a great deal of money it would otherwise be unlikely to ever see again.

Otmar Issing,(the former member of the Bundesbank and the ECB Governing Council who resigned last year in protest at the ECB’s buying of government bonds in the secondary market) in a recent newspaper interview may have rather given the game away when he said that although it was legally impossible to kick Greece out of the EU, if it required external financial help then what could be done is to tell them to implement reforms you know that they cannot manage to achieve, and when they fail you can say that the basis for financial help is not there, and leave the Greeks to decide what they want to do. Schauble, the German Finance minister recently told reporters that Greece must implement the agreed measures and reforms and that all the Greek parties must agree to them as well – a remark that fits Issing’s strategy exactly.

Further the ECB’s move late last year to provide almost E500bn in liquidity to banks for 3 years at 1% in a Long-Term Repurchase Operation (LTRO), to be followed by another one at the end of February, could easily be interpreted as ensuring that all Eurozone banks have access to sufficient liquidity to survive a Greek default to permit their solvency issues to be dealt with at a later date.

A Greek default looks very near; preparations are being made by the authorities, markets are to a great extent ready for it, but the chain of consequences of such an event is very uncertain.

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