Germany Wants 50% Default for Greece

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.


Italy Seeks a Bail Out

From Market Watch:

Italy’s economy minister has said that a solution to the euro zone’s current debt crisis would be the creation of euro bonds, according to a report published Saturday.

Reuters reported that Giulio Tremonti said that such bonds would have prevented the continent from reaching the point it has, with Greece, Ireland and Italy among countries pushing through austerity measures in the hope of avoiding sovereign defaults.

Tremonti said joint-issued bonds would make nations’ debt a shared burden, and was quoted by Reuters as saying that they would be “master solution” to the crisis…

It is actually a way of making Germany a co-signer on Italy’s debt…and Spain’s and Portugal’s and Greece’s, etc, etc etc.  I’m not enough of a finance guy to figure out exactly how such a thing would play out, but I do know enough to understand that Germany cannot underwrite the bad debt of the Eurozone.  This may well plug the leak, but only for a few months…and you’d have to get German taxpayers to agree to put their stellar bond rating on the line for Italy and the rest of the PIIGS.  That is a dicey proposition, at best.

In the end, the fact remains that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) owe far more than their economies can pay back .  There is no way to make up for this deficit between debt and wealth…either by printing money (and thus devaluing the currency) or by straight default, those who hold the bonds of the PIIGS will have to take a loss.  There may be a way to soften the blow, but the blow must fall…default (straight up or disguised) absolutely will happen.