Schäuble Warns of “Sudden” Greek Default

The governments of Greece – new and old – screwed up. Other debt-sinner countries are able to borrow at near-zero or negative interest rates, simply taking money from investors with a promise to return it on a given day in the future if investors give it new money to do so. These investors, it must be said, had their brains washed by the ECB and other central banks in order to allow this to happen. But the governments of Greece somehow missed that gravy train.

Now, no one wants to lend Greece money at negative interest rates, least of all the Greeks themselves, who know their governments better than anyone else on the planet and have less trust in it than anyone else on the planet: they’re yanking their euros out of their banks even as the ECB is propping them up with fresh euros that ultimately belong to taxpayers elsewhere.

This weekend, representatives of the “institutions” – the unmentionable “Troika” – are trying the hash out a reform package with the new team from Greece that does not include Finance Minister Yanis Varoufakis, who’d been shoved aside. On Monday, the finance ministers of the Eurogroup will meet in Brussels.

Without an agreement on the implementation of the reforms, Greece won’t get the outstanding relief funds of €7.2 billion. And then what? The government has practically no funds left. Time is running out. Monday is it. The Big Day. Again.

“I don’t see that everything will be solved by then,” German Finance Minister Wolfgang Schäuble said in an interview in the Sunday edition of the Frankfurter Allgemeine Zeitung, one of Germany’s largest papers, throwing cold water on any hopes. He doubted that the Greek government even knew what exactly was going on in its finances.

“Such processes also have irrational elements,” Schäuble warned. “Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency.”

On the principle that a country is slowly zigzagging down that path paved with lots of good intentions, false hopes, and lofty promises and, BAM, suddenly, it’s over. So maybe Monday? Or next month? He refused to nail down a specific point in time.

When asked if the German government has made preparations for such an eventuality, he said:

“There are issues that a prudent politician must not answer. Otherwise there will be misunderstandings. Jean Claude Juncker [President of the European Commission and former President of the Eurogroup] once said that sometimes you must play fast and loose with the truth. For me, these things are more complicated. Therefore, I rather say nothing at all.”

That’s a resounding “yes.” Germany is prepared. The financial markets have no doubts and refuse to get panicky. The German government is going to handle this just fine, they’re saying.

But in August 2013, during the run-up to the general elections in the fall, when the cost of the Greek bailouts to German taxpayers was one of the themes, Schäuble had this to say, thus playing fast and loose with the truth:

“One thing is certain: there won’t be a second debt cut for Athens.”

The first one having been the 70% haircut imposed “voluntarily” on private-sector bondholders in 2012. The second one would hit public institutions, such as the ECB and the bailout funds, and ultimately taxpayers in Germany and other countries.

The “one thing” that was certain in 2013 before the election is now out the window. A Greek default would almost certainly entail some kind of debt relief for Greece, hence a haircut for taxpayers in other countries. They just haven’t been told yet.

But Germany would “do everything to keep Greece under responsible conditions in the Eurozone,” he said. “It must not fall apart because of us.” On this issue, he and Chancellor Angela Merkel are in complete agreement, he said.

There have long been voices that confirmed that if Greece defaults, there could be a haircut for public bondholders in some form (swapping existing debt for zero-interest debt with a 1,000-year maturity?) while Greece remains in the Eurozone. That appears to be the direction the German government is heading.

And Schäuble defended his best buddy Varoufakis. Few people have managed to rise to such media adulation and then plunge from it as quickly as Varoufakis. Whatever he was trying to do, it didn’t work. Forget game theory. “We both are finance ministers and bear responsibility, so we work well together,” Schäuble said. “First, the media make Varoufakis into a superstar, now they’re writing him off. The one is as wrong as the other.”

With this immaculately-timed interview, the German government acknowledged that it’s ready for Greece’s insolvency and default, whenever it may come, including Monday, after having denied it for years, and that it would continue working with Greece to keep the Eurozone together. What’s sacred for the Merkel government is the Eurozone, not its taxpayers. They already got shafted.

But here is the thing: the Greeks could solve the crisis on their own, if they wanted to. Or do they know something that others don’t? Read…  If Greeks Did This, the Terrible Crisis Would Be Over

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  12 comments for “Schäuble Warns of “Sudden” Greek Default

  1. Julian the Apostate says:

    Live by the media, die by the media. Varoufakis was the lightning rod, which is now removed from the Greek edifice. Now we await the lightning strike that will burn it down. And the row houses that are connected to it, like in Filthadelphia.

  2. sangell says:

    If Juncker had a drinking problem before he became President of the Euro Commission he’s probably hitting the sauce before breakfast these days. Hard enough keeping this unwieldy locomotive on the tracks with Greece threatening to derail it but he’s also got the Finns wanting to cut Greece loose ( and it takes a unanimous vote to push another bailout through), a very shaky ceasefire in the Donbass and on top of all that, David Cameron wanting to renegotiate Britain’s terms of membership in the EU prior to a referendum.

    If the EU survives all this it is only because the alternative is even more unthinkable.

  3. californiawoman says:

    This constant focus on Greece in the media makes me think it is a distraction. Not sure what we are being distracted from.

    • Wolf Richter says:

      “Constant focus”? Last time I wrote about Greece was 3 weeks ago. A country going broke IS a big issue. Doesn’t happen every day, unlike companies, which go broke all the time, even on weekends. The media should report on it. It’s not a “distraction.” It is one of the many things heading in the wrong direction in this crazy upside-down global economy.

      • Greg says:

        The US has been going broke for years and is in debt for trillions of dollars. Their manufacturing sector has been all but shipped to China and their true jobless figures are near 25%. Greece’s debt is a drop in the bucket compared to the American quagmire. All Greece needs is its own Federal Reserve to print billions of QE dollars, and its problems would be over. Plus a powerful military which it could use to threaten its creditors. Sadly this is the world we live in.

      • a Texas libertarian says:

        I for one am still interested in Greece. Please keep the updates coming.

        Do you think there’s a chance Greece may adopt the ruble or the yuan after they default on their euro denominated debt? The drachma seems out of the question given the mood of the people towards the government. I guess as long as the Greek citizens can mulct foreign tax payers to fund their pensions and entitlements, they are happy.

  4. Yancey Ward says:

    “Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency”

    Of course, this is only true for those who don’t actually use their brains, like Finance Ministers. What is actually “sudden” is the realization that it is happening, not that it was coming.

  5. Petunia says:

    Greece and the Eurozone are like a bad catholic marriage where both are cheating and disrespecting each other but they don’t get a divorce, because that would be wrong!

    • Owl says:


      A bad Catholic marriage?

      What explanation do the Clinton’s have? (Methodist and Baptist)

      Divorce is painful and not unknown to Catholics. Please refrain from this analogy.

      Respectfully submitted….

      • Petunia says:

        Having grown up in a catholic family and a catholic neighborhood, I know of what I speak. While I opted out at an early age, I don’t think my analogy was in anyway incorrect. As far as divorce goes many religions accept it as a remedy to a bad relationship, which is much more humane than making people suffer for naught. I hope my reply is equally respectful.

        • a Texas libertarian says:

          While one should always strive to keep his or her commitments, ALL contracts should be voluntary, not only in the nature of the entrance, but in the nature of the exit as well. This goes for Greece and the Eurozone too. The European governments made a bad investment on Greece, and now they will reap the consequences with a default, but the citizens of Greece should not be made into slaves in order to pay back this debt.

  6. Julian the Apostate says:

    To Californiawoman, the problem in Greece isn’t Greece per se, but the possibility of a ‘domino effect’ that could set a template for other indebted nations in the Eurozone and cause a mass exodus, or a massive bank run. Hence all the recent agitation for a ‘war on cash’. Who woulda thunk it that fiat paper could become a ‘barbarous relic’?

Comments are closed.