15 Feb 2012

Eurozone reaches its Lehman moment as Germany ‘insults’ Greece

News has just dropped of an extraordinary speech from Greece‘s President at the Defence Ministry in Athens. According to Reuters, the normally apolitical Papoulias, a veteran of the Greek resistance movement against German WW2 occupation, said this of Germany’s finance minister Wolfgang Schaeuble:

“I cannot accept Mr Schaeuble insulting my country… who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?” he said.

I don’t know what the specific insult was. Perhaps it was Mr Schaeuble’s suggestion that Greece should suspend elections and install a non-political Italian-style technocratic Government, to help Greece’s isolated technocrat PM, Mr Papademos.

But offence was certainly being taken by the likely post-election PM of Greece, Antonis Samaras, who was obliged to write a letter to the ECB President Mario Draghi for the second time.

The deal that was voted through as Athens burned in the early hours of Monday morning, suddenly looked like unravelling after the €-donor nations took fright at Mr Samaras’ suggestions that the deal could be renegotiated post-election. That led to the cancellation of today’s Eurogroup meeting. A teleconference took place instead, meant to steady nerves, and reassure.

But some damage has been done, particularly because as a leak of the draft deal to the FT has shown,  it will require ratification in parliaments in the Hague, Helsinki , Berlin etc. As the FT points out, these parliaments could well have to vote blind on this deal, ie before Greece has actually enacted its side of the deal.

These euro bailout negotiations have always been pieces of politics, of economic diplomacy, rather than economics alone. To square off the voting public of one country is difficult enough. When you have diplomatic negotiations like this with a backdrop of angry historical differences, you need a giant vat of goodwill at the top.

The President’s remarks, and some others emanating from Germany and smaller AAA nations such as Holland and Finland suggest that the goodwill is beginning to run dry. The € ‘mini-me’s seem particularly aggrieved about their ability to trust Greek politicians. When you throw in the fact that Greece’s hard left parties now command 42.5 per cent of the polls – more than the ND/ Pasok mainstream coalition that voted through the deal – you can start to see how an election might throw up an “inconvenient” result for the Troika.

Indeed Greece’s finance minister has just said that the Eurogroup asked for commitments from the hard-left parties on backing the deal after an election. No chance, surely.

All the while, the chatter in euro policy circles, as I wrote on Monday, is that the Greek rot will not infect the rest of the euro area. A default could be managed. Even the odd French bank has managed to dispose of much of its exposure. We’ve had months to prepare. And, so the Lehman moment comes full circle. Three and a half years ago we were told exactly the same by Hank Paulson and co re Lehmans: The system, we were told, was strong enough. Finns, Dutch and some Germans increasingly think the same about a Greek default.

*So the statement from the President of the Eurogroup after the teleconference has just dropped: Basically the Greek finance minister has just promised 325m euros of cuts further to those identified ion Sunday, that presumably no Greek gets to have a say in. He “is confident” that all necessary decisions will be taken at the in-person Eurogroup on Monday. But this is the key sentence:

“Further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of programme implementation and to ensure that priority is given to debt servicing. This will strengthen debt sustainability further.”

This could mean a special Troika authority in Athens to oversee payments – some sort of Escrow account so that debt repayments are separated from Greek spending. Perhaps the collateral debate will re-emerge.
In theory these negotiations are solvable. But when you throw in open discussion amons the € AAAs that Greece should postpone its elections – then in practice, the atmosphere just got poisonous.