Germany Wants 50% Default for Greece

Mark Noonan

From Zero Hedge:

…the debt rollover plan has imploded and means that the entire Greek bailout has collapsed as some had expected. And now that it is clear that contagion is threatening to sweep through the core, it is back to Germany to prevent the gangrene, no longer contagion, from advancing beyond the PIIGS. However, in order to prevent a full out revolution, Germany’s economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a “controlled” default by Greece and 50% haircuts for private bondholders (as German banks have long since offloaded their Greek bonds).

This means that “Lehman” is indeed here: just like back in 2008 Paulson et al thought they could contain the adverse effects of a Lehman bankruptcy, while the financial system ground to a halt 4 days later when money market funds broke the buck, so now Greece is somehow expected to remain in the eurozone even as it files bankruptcy…

The bottom line appears to be that the Europeans need to come up with $2 trillion to keep their financial system afloat – that is, to keep the bad news confined to the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and keep it out of France. What Germany seems to want – and it is reasonable – is an end to the Greek problem.  That if this is going to happen, it happens once and for all.  The Greek bondholders lose 50%, Greece gets bailed out…and hopefully Greece manages to get its finances in order sufficiently to service the rest of their debt.

The trouble is whether or not bailing out Greece – even with a 50% “haircut” for bondholders – will really do the trick.  Greece is pretty small potatoes as far as the Eurzone economy goes.  Looming gigantically larger are Spain and Italy.  As far as I can determine, both of those nations are already fundamentally bankrupt and cannot rely upon the private economy to service their debt as their bonds come due.  The only entity out there with the willingness to heavily purchase Spanish and Italian bonds would be the European Central Bank, or whatever financial bail out structure the Europeans come up with.  And where does the money come for that? From the Germans who will have already bailed out Greece and have no spare money left?  From the European Central Bank printing up a bucket of money?  Where?

It is the lack of real money – someone out there with trillions not already committed to some other enterprise – which makes me figure all these efforts to avert collapse are meaningless in an economic sense.  In a political sense, they may help the Ruling Class (European and American) ride out the political storm now through 2013.  The cost will be enormous, but such things never disturb people who are rich, in charge and determined to stay that way.

 

3 thoughts on “Germany Wants 50% Default for Greece”

  1. RetiredSpook September 25, 2011 / 8:44 am

    And where does the money come for that? From the Germans who will have already bailed out Greece and have no spare money left? From the European Central Bank printing up a bucket of money? Where?

    There’s always our FED.

    by Associated Press | Sep 21, 2011 9:15 AM ET

    FRANKFURT, Germany — The European Central Bank says it loaned $500 million to a single bank for seven days, raising further fears that a major financial institution could be in trouble.

    The bank said Wednesday on its website that it would make the loan to a single unidentified bidder from its swap line through which it obtains dollars from the U.S. Federal Reserve.

    Europe’s sovereign debt crisis has provoked fears about the health of the banking system because of the potential for losses from holdings of bonds issued by Greece and other troubled countries. Banks are increasingly parking money overnight at the European Central Bank rather than loan to each other.

    Some banks are unable to borrow normally from other banks because of fears they will not pay the money back, leaving them dependent on last resort credit from the ECB. The ECB, working with the U.S. Federal Reserve, is making additional three month loans in dollars available but the first of those offerings will not be available until October.

    Fears have focused on French banks, whose shares have been heavily sold off over the past few weeks.

    Sounds like the forces that have been keeping this ball in the air well beyond what any reasonable person thought possible are about to run out of gas.

    • neocon1 September 25, 2011 / 9:48 am

      We are bankrupt, the well is empty, yet these Morons keep pumping from the dry well promising every one more water.
      FOOLS led by incompetent FOOLS and liars.

      • RetiredSpook September 25, 2011 / 11:06 am

        We’ve all heard the analogy to “spending like drunken sailors”, but at least a drunken sailor stops spending when he runs out of money.

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