“No, absolutely not,” said European Central Bank President Mario Draghi when asked if the euro was in danger. “The euro is irreversible,” he added just as a whiff of panic began sweeping over the Eurozone. Everybody was supposed to enjoy their long vacation, and nothing important was supposed to happen. But, like a group of disruptive homeless guys, the ECB, the International Monetary Fund, and politicians have apparently gotten tired of kicking the Greek bailout can down the road, and they stomped on it instead.
Last week it was the ECB; it announced that it would no longer accept Greek government bonds as collateral, thus cutting Greek banks off from ECB funding. They will now be dependent on Emergency Liquidity Assistance (ELA) by the Bank of Greece, an unsustainable, risky measure.
Over the weekend, word seeped out that the IMF, having lost patience with Greece’s stalled reform efforts, would be unwilling to contribute more funds to the bailout. A huge blow. Vigorous denial by the IMF? Nope. On Monday, it only said tepidly that it would be “supporting Greece in overcoming its economic difficulties.”
Inspectors of the Troika—the EU, the ECB, and the IMF—are trundling into Athens today for meetings and inspections starting on Tuesday. Their final report will be the basis for the Troika’s decision in September to make the next bailout payment, or to let go. Politicians appear to be holding off on their final judgment until then. But they’re talking—and it doesn’t look good for Greece. Its demands to renegotiate the agreed-upon reform measures and then to delay their implementation has hit a wall of resistance.
“We won’t agree to any substantive change of the agreements we made,” said German Foreign Minister Guido Westerwelle. Economics Minister Philipp Rösler was “more than skeptical” that Greece could work out its problems. But any decision would have to wait for the final Troika report. “If Greece cannot meet the stipulations, then there won’t be any more payments,” he said. Greece would have to default, which might encourage it to leave the Eurozone. But no big deal: “Greece’s exit has long ago lost its scariness,” he said.
Giorgos Papakonstantinou, Greek Finance Minister from October 2009 until he was replaced by Evangelos Venizelos in June 2011, doubted the abilities of the Greek government to deal with the challenges and was “not optimistic“ that it could remain in power much longer.
Even the Big Kahuna, who is on vacation, and who’d pushed for these serial bailouts though they put deep rifts into her coalition government, lost patience with Greece. It leaked out that Chancellor Angela Merkel considered it “unthinkable” for her to beg the Bundestag on a third bailout package. And a third bailout package would be required if Greece’s demands for watering down the reforms and for delaying their implementation were met—they’d raise the costs by an additional €30 to €50 billion.
The next opportunity for Greece to default is August 20, when it has to pay the ECB €3.8 billion, which it doesn’t have. As Greece’s debt is now mostly held by public institutions, including the ECB, a default would impact taxpayers outside Greece. Requests for emergency funding have fallen on deaf ears. So Greece could try to sell three- or six-month bills at astronomical rates, but most likely, the ECB will find a way to keep it afloat until a political decision is made in September.
With Spain under fire, and with Italy—and thus the Eurozone as a whole—at risk, the perception is growing that the Eurozone might be stronger if it scuttled its leakiest ship. The surprise factor has long been wrung out of the system. Markets are ready. After a bit of chaos, there might even be relief. And that perception, if it has the upper hand, will seal Greece’s fate.
Now the strategy is to prevent contagion. The temporary EFSF bailout fund is ready, but too small. What is needed is the larger firewall that the “permanent” ESM bailout fund will provide, once operational. Hence the enormous pressure on the German Constitutional Court to wrap up its review of the ESM and nod it through by September 12.
By getting the Greek default over with, politicians and the Troika could focus on bailing out Spain. Unlike Greece, Spain is critical to the survival of the euro—and after Spain there is Italy, whose debt is huge, and even the ESM won’t be able to bail it out. All that remains is hope that contagion somehow stops before it gets to Italy. Hope, or a treaty change that would allow the ECB to buy sovereign bonds on a massive scale and bail out banks directly. The whole debt crisis would be over. To be replaced by a crisis of a different and more pernicious sort. Unlikely that the “northern” Eurozone countries would go for that.