It is becoming increasingly clear that the German leadership may no longer be interested in seeing an orderly solution to the Greek debt crisis or to the wider crisis of confidence in the European banking sector. Alternatively, it may not be competent to do so.
Over the weekend, the IMF-World Bank annual meeting in Washington DC produced a temporary calm on the markets after European leaders reassured their G20 counterparts that they, and the ECB, would do everything possible to address European sovereign debt and banking capitalisation issues.
The markets rebounded on Monday and Tuesday, helped by the fact that the Greek parliament passed another round of austerity measures on Tuesday evening. Greek Prime Minister George Papandreou was not even in Greece at the time: he was meeting Angela Merkel in Berlin, where the German Chancellor declared that she wanted to see a “strong Greece in the Eurozone.”
The sentiment was reinforced by the announcement that the Troika “inspectors” would be returning to Greece this week, but also that Private Sector Involvement (PSI) had reached 90% in the second bail-out package.
Lo and behold, as if things were suddenly going too well, today the issue of re-opening the PSI agreement was suddenly broached by Wolfgang Schauble and, apparently, Angela Merkel. As the Financial Times reports:
While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.
This has had a predictable dampening effect, with pushback led by German banks. As Reuters reports:
German banks are resisting political pressure for them to accept larger writedowns, or “haircuts,” on their holdings of Greek government debt, a person briefed on the talks said. German lawmakers have called on lenders in recent days to accept a larger writedown than the 21 percent proposed by the , an industry lobby group, said the person, who declined to be identified because the talks are private. Banks are concerned the IIF agreement may unravel if they are forced to accept further losses, the person said.
This new initiative, expressed just 24 hours before the German Parliament finally votes on extending the EFSF (which was initially proposed on July 21st, but has still not been enacted), follows a range of similar flip-flops:
· Wolfgang Schauble initially declared, in July 2011, that Greece would receive the fifth bail-out tranche before the vote. Once the vote on the Mid-Term Fiscal Adjustment Programme was passed in the Greek parliament, Mr. Schauble reversed opinion, stating that the fifth tranche would only be released once the regular inspection took place.
· The same official has been discussing a “Plan B” on Greek debt, which implies a haircut of at least 50%, notably last week. Among other factors, this has led to a massive decline in share prices as uncertainty over the Greek bail-out broke out again last week.
· Most memorably, FDP leader Philipp Rossler had to be muzzled by Angela Merkel for suggesting that a Greek default and Eurozone exit were likely three weeks ago. It is ironic, to say the least, that this same person is supposed to be leading a delegation of German businessmen interested in investing in Greece at the beginning of October.
It should be a truism that in a financial crisis, abrupt changes in direction of this sort do not help to solve the situation. Timothy Geithner’s words last week remain as true then as they are today:
“What is very damaging (in Europe) from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need both to work together to do what is essential to the resolution of any crisis,” he said.
I do expect the Bundestag to vote through the EFSF expansion tomorrow. But the German policy response is as far behind the curve this week as it was last week. With Germany’s elected leadership changing their opinion every 2 days and creating incredible market uncertainty, it will be a miracle if the European economy survives unscathed.
Zero Hour Approaches. September 23, 2011
Sleepwalking into Disaster. September 18, 2011
European Cacophony on Greece Continues. September 8, 2011
The Greek Debt Crisis and International Contagion. July 13, 2011
© Philip Ammerman, 2011