Greece needs 53 billion in euros to cover its deficit and debt service this year. Germany and France are dragging their feet rather than providing Greece immediate aid, for reasons that are not entirely clear. It may be based on their concerns that Greece does not have a clear picture of its own finances and that its budget is a farce. The southern European nation said its deficit, as a percent of GDP this year, will be 12.9% – this is shortly after it claimed that it would be 12.7%. Fitch just downgraded Greek debt to BBB- with a negative outlook based on these factors.
German banks face losses of as much as 40 billion euros if Greece defaults. The German government would be the only authority to which those banks could turn to cover their capital needs.
So, Germany has two choices. It can bail out its banks or it can bail out Greece.
The steps that will lead Germany away from Greece and into a position to aid its own banking system are simple:
1. The euro zone and IMF, which is willing to support a euro zone bailout of Greece, realize the situation in the troubled nation is worse than expected. The ECB, which does not have the charter to provide capital, is helpless
2. Greece continues to madden the euro zone nations, bond holders, and the capital markets by failing to produce a realistic budget.
3. The bets against Greek debt continue to rise along with the interest that the Greeks will have to pay to cover their debt. Greece reaches the point where the market expects interest rates of over 10% to buy its sovereign paper.
4. Germany is the only euro zone country that can afford to solve the Greek debt problem. Capital markets realize that Germany will have to loan Greece money at rates that are well below what the southern European nation would have to pay in the open market.
5. Germany turns its back on Greece’s need for Toyota-like funding of zero percent interest for 60 months.
6. Greece races to exit the euro zone so that it can devalue its currency.
7. By the time Greece can go through the devaluation process, it becomes insolvent.
8. Greece defaults.
9. European banks face 100 billion euro losses from their holdings in Greek sovereign paper.
10. Germany bails out is own banks with capital it might have otherwise put at risk through loans to Greece.
11. QED
Douglas A. McIntyre
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