Sunday, July 12, 2015

Greek Capitulation Not Good Enough for Schäuble & Co. Grexit Unavoidable

Yves Smith for all the arrows she has absorbed for her pessimism about the bargaining positions of both Greece and her creditors has for the must part been reliably on the money. This morning she writes that "A Grexit Looks Almost Inescapable":
Despite my generally dour outlook, I never thought we’d arrive at the insane juncture we are at now, that of a Grexit being all but baked in. This would be a catastrophic outcome, most of all for the Greek 99%. If a Grexit comes to pass, it should deservedly blacken the names of everyone involved, most of all Merkel, whose incrementalism meant that all of the unresolved contradictions of the Eurozone produced intensifying pressure on its fault lines, and Greece proved to be the breaking point. But as we’ll see soon, her finance minister Wolfgang Schauble would also get a particularly large badge of dishonor. 
You don’t need to know much to know that the odds of Greece escaping a Grezit are becoming vanishingly small as time progresses, and there is perilously little time left. And mind you, this sorry trajectory is occurring even after the Greek government prostrated itself and offered to meet even more stringent conditions than its voters overwhelmingly rejected in a referendum less than a week ago.
The big development is that last night's meeting of eurozone finance ministers adjourned minus any resolution. As James Kanter reports in "Meeting on Greece Debt Breaks Up With No Deal" the hardliners -- Germany, Finland, Slovakia, et al. -- don't believe that Greece will implement its latest austerity proposal:
Despite Greece’s capitulation on those terms, many countries came into this weekend’s final round of negotiations skeptical of the Tsipras government’s commitment to seeing through the changes and putting his country on firmer financial footing — and weary of the constant brinkmanship that has characterized the months of negotiations over Greece’s latest crisis.
Instead of working through the night to hammer out a statement on requirements for Greece, as had been expected, the meeting was suddenly called off shortly before midnight, and ministers left without even holding a formal news conference.
“The issue of credibility and trust was discussed, and also of course the financial issues involved,” Jeroen Dijsselbloem of the Netherlands, the head of the so-called Eurogroup of ministers, told reporters. “It is still very difficult. but work is still in progress,” he said, adding that discussions would continue later Sunday morning.
From the start, it was clear that Mr. Tsipras’s gambit had not entirely won over Germany and other countries that have been skeptical about giving a new round of loans to Greece after years in which successive governments in Athens have struggled to carry out changes that creditors have demanded as a condition of the bailouts.
“We will have exceptionally difficult negotiations,” Wolfgang Schäuble, the hard-nosed German finance minister, said on Saturday before the meeting. “We won’t be able to rely on promises.”
His prediction proved accurate, as he and fellow ministers wrangled with little apparent progress, seeking more assurances from Greece that it was committed to changing its ways, and weighing the desires of France and Italy for a deal against the more skeptical stance of Germany and the possibility of outright opposition from Finland.
What Schäuble did do in the 11th hour was forward a proposal demanding that Greece essentially be placed in receivership and banned from the euro for five years. According to The Guardian's Ian Traynor in "Greece nears euro exit as bailout talks break up without agreement," who Yves Smith quotes at length in an update to her post,
With Greece on the edge of financial and social implosion, eurozone finance ministers met to decide on the country’s fate and on what to do about its debt crisis, after experts from the troika of creditors said that new fiscal rigour proposals from Athens were good enough to form “the basis for negotiations”.
But the German finance minister, Wolfgang Schäuble, dismissed that view, supported by a number of northern and eastern European states. “These proposals cannot build the basis for a completely new, three-year [bailout] programme, as requested by Greece,” said a German finance ministry paper. It called for Greece to be expelled from the eurozone for a minimum of five years and demanded that the Greek government transfer €50bn of state assets to an outside agency for sell-off.
Timo Soini, the nationalist True Finns leader, meanwhile, threatened to bring down the government in Helsinki if Alex Stubb, the finance minister, agreed to a new bailout for Greece. Stubb apparently came to the crunch meeting on a new bailout without a mandate to agree one.
“The hawks are very vocal,” said an EU diplomat. “It’s very tough.” Berlin also demanded stronger and more intrusive powers for outside monitors to police the economic and fiscal reforms that Alexis Tsipras, the leftist Greek prime minister, would need to commit to to secure the new bailout.
Saturday night’s talks were not to agree on a third bailout, but were negotiations on whether to launch more talks on Greece’s third rescue package in five years. The ministers faced formidable problems, said Schäuble, who argued debt relief for Greece, broadly seen as essential, was banned by the EU treaties: “Athens’s proposals are far from sufficient. The funding gaps are way beyond anything we’ve seen so far,” he said.
The hard line was echoed by Peter Kazimir, finance minister of Slovakia, who said that new austerity measures tabled by Athens were already past their sell-by date.
The eurozone has been united for five months in the negotiations with Tsipras, but with the stakes rising greatly in the last 10 days, major divisions have surfaced, with the French working tirelessly to save Greece and the hardliners now pushing Greece’s expulsion for the first time openly.
The European commission and the European Central Bank issued dire warnings that a failure to grant Greece new rescue funds of up to €78bn would put the country on a trajectory of complete banking and financial collapse.
The widening gulf between eurozone hawks and doves paves the way for an acrimonious summit on Sunday, with France and Italy lining up against Germany and the northern and eastern Europeans. Matteo Renzi, the Italian prime minister, is expected to tell chancellor Angela Merkel that enough is enough and that Greece should not have to put up with any more humiliation.
Merkel is under intense pressure from the Americans not to “lose” Greece and is worried about her own legacy. But Greece fatigue is becoming endemic in Germany, and she faces growing unrest in her party ranks where Schäuble’s hard line is popular. She was said to have endorsed Schäuble’s tough position.
Whether the U.S. can work its will once again on a reluctant Merkel, as it did in the case of Russian sanctions and the whole smorgasbord of riots, a coup and the downing of the MH17 passenger jet, seems a long shot to me.

The Obama administration has not been particularly assertive about securing an amicable resolution to the Greek debt crisis. Getting the IMF to release its report saying Greece's debt load was unsustainable and that debt relief must be considered was helpful to Syriza in the run up to last Sunday's referendum, but it was far from the kind of full-court press trotted out to get the EU to embrace sanctions on Russia.

The U.S. is allowed to run roughshod over Europe when it comes to NATO force projection. But when the question is Germany's economic hegemony over the continent, Uncle Sam apparently has to wear velvet slippers.

Schäuble's 11th-hour proposal, one that Traynor says Merkel has signed off on, at least clarifies the root of Germany's incessant demands for austerity. It is not about a belief that austerity will lead to growth; that has been debunked long ago. It is about taking possession of Greece lock, stock, and barrel. Likely in the private moments of hardliners among the Finns, Germans and Slovaks are thoughts about Greek women. Why not put the young fertile ones on the auction block too?

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