The Unanswered Questions of the Greek Bailout

Mish Shedlock  |

As the Greek bailout marches on, no one that matters dares ask the pertinent question: How can Greece pay back over €400 billion, when they could not pay back either of the last two bailouts?

Borrowing from Peter to Pay Paulopolis

We supposedly have seen progress. After all, Greece will be able to make its required July 20 ECB repayment, right? Sure...thanks to another €86 billion bailout, Greece will be handed the money and will then hand it right back. The first installment will magically be just enough for Greece to repay the ECB.
Draghi Affirms Faith

In this faith-based, can-kicking exercise, Draghi Affirms Faith in Greece’s Place in Euro

 Mario Draghi, head of the European Central Bank, affirmed his faith in Greece remaining in the euro as the central bank raised its limit on emergency loans to Greek banks by €900m over one week. 

“The ECB continues to act on the assumption that Greece is and will remain a member of the euro area,” Mr Draghi said.

Banks to Open, with a Catch

Greek banks will purportedly reopen on Monday after having been shut for about two weeks. So, is there a catch? You bet there is - banks will be open for "all services which do not give rise to capital flight, and capital controls will remain in place." Want to make a deposit? Sure, that will be allowed. Want your money back? Well, you are going to have a problem. How big of a problem? We'll find that out Monday.

To give appearance to the idea that things are improving, I suspect customers will find they can take out another €10 euros or so, per day, perhaps €70 euros, up from the current €60. If my guess is correct (and you are foolish enough to have €25,550 in the bank), it will take you a year to get your money, even if you religiously take out the maximum every day.

Of course, that assumes everyone else does not do the same. If they do, the ECB will put a halt to it.

Schäuble Says Grexit is a Better Idea

Reuters reports Schäuble Casts Doubt on Chance of Greek Bailout Success

 German Finance Minister Wolfgang Schaeuble questioned whether Greece will ever get a third bailout programme on Thursday, a day after the Greek parliament passed a package of stringent measures required to open negotiations on financial aid.

Schaeuble has submitted a request to parliament to agree to opening talks, but he has said it would be hard to make Greece's debt sustainable without writing some of it off - an idea Berlin considers to be illegal as long as Greece remains within the euro zone.

Schaeuble, who has raised the idea that Greece take a "time-out" from the euro zone, said a haircut would be incompatible with the currency union's rules. "But this would perhaps be the better way for Greece," he said.

The proposal for a temporary 'Grexit' has already caused ructions in Merkel's ruling coalition, upsetting some senior Social Democrats.

Question of Haircuts

Schäuble's position, and that of the German constitution, is that there can be no haircuts within the eurozone. No one of any importance really cares about the German constitution or logical assumptions on debt sustainability. Merkel will ram through the bailout package, oblivious to Schäuble's objections, and also oblivious to the IMF position that Greek debt is not remotely sustainable and haircuts are needed. 

For details on the IMF's position, please see White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt

So will the IMF do what they threaten? Good question, but so far, no one but Germany has done what they threatened to do.

Addendum: Grexit Back on Table

Shortly after I typed the above header, the Financial Times provided more details in Germany’s Wolfgang Schäuble Puts Grexit Back on the Agenda

 Days after Greece appeared to escape crashing out of the euro, hawkish German finance minister Wolfgang Schäuble has put Grexit back on the political agenda, raising tensions in Berlin and across the EU. 

Speaking before a key Bundestag vote on Friday, Mr Schäuble said voluntary departure from the eurozone “could perhaps be a better way” for Greece than a proposed €86bn bailout package, which was painfully assembled at a marathon eurozone summit in Brussels over the weekend. 

It is uncertain how much leeway he has been given by chancellor Angela Merkel to advance a historic rupture of the eurozone that he believes would ultimately strengthen both Greece and the single currency. 

Mr Schäuble said in a radio interview there was widespread concern — including at the International Monetary Fund — that Greece needed a debt cut for the rescue to work. But, he noted, a “debt cut is incompatible with membership of the currency union”. 

Some EU officials believe Mr Schäuble’s repeated insistence that the IMF, which has partnered the EU in previous rescues, be included in a new bailout may be intended to engineer an eventual Grexit.

Another Hour, Another Twist

If Germany approves the bailout package (which seems overwhelmingly likely) then Merkel has a huge problem if the IMF insists on haircuts. Clearly, that is Schäuble's fear...and quite a reasonable one, at that.

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