No Bad Compromises Says Germany

Today German Chancellor Angela Merkel proclaimed Greek Diplomatic Offensive Is Failing.

Merkel’s Christian Democratic-led bloc in parliament has agreed not to give in to any “bad compromise that “defacto adds up to a debt writedown,” Hans-Peter Friedrich, a deputy leader of the caucus, said in an interview today.

Greece, not Germany, is under time pressure,” Friedrich said, citing the Greek government’s cash requirements following the end of the current round of bailout funding at the end of the month. Tsipras and Varoufakis “aren’t in a position to make demands, let alone try blackmailing tactics,” he said. 

Noose Tightens on Greece (and Europe)

France is the only country that had shown any sympathy towards restructuring Greek debt.

However, Greek hopes for France hit the hard rocks of reality today when French President Francois Hollande warned Greek Prime Minister Alexis Tsipras that “respecting the rules is necessary for all, for France too, and it’s not always easy.

Southern Solidarity?

Think Spain is sympathetic to Greece? Think again. The Financial Times reports Spain Keeps Hawkish Eye on Greece as Southern Solidarity Crumbles.

There never was any “Southern Solidarity” on this issue (except with Germany).  I explain why in Voter Sentiment in Spain Shifts Towards Podemos in Growing Numbers.

Podemos and Syriza are philosophically aligned, and the leaders of both parties communicate with each other.

Meaning of Solidarity

Merkel has repeatedly pledged “solidarity” with Greece. Her curious definition is along these lines: “Do exactly what we tell you, or suffer the consequences“.

Meaning of Generosity

German finance minister Wolfgang Schäuble said “Europe had already pushed its generosity to Greece to the absolute limit. We need solidarity in Europe, and besides we cannot be blackmailed.

Schäuble’s definition of “generosity” is to load Greece up with €250 billion in debt that cannot possibly be paid back, then demand repayment.

Alexis Tsipras politely blasted the alleged German “generosity” in a letter to the German newspaper Handelsblatt. (See Alexis Tsipras “Open Letter” to German Citizens Regarding Extend-and-Pretend Unserviceable Debt).

I happen to agree with that letter in entirety, even though I strong disagree with other Syriza positions.

Please read the letter if you haven’t yet done so. It makes a mockery of the alleged “generosity“.

Smart Debt Engineering

Yesterday the stock, bond, and commodity markets went absolutely giddy over a Smart Debt Engineering proposal by Greek finance minister, Yanis Varoufakis.

Varoufakis said the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. To avoid the term debt “haircut”, Varoufakis instead proposed  a “menu of debt swaps” and “perpetual bonds”.

I commented “Perpetual bonds: clearly never meant to be paid back. Gotta love the honesty of the idea.

No Foot Kissing

In spite of the fact that Greece had done nothing but ask for a “haircut” disguised by the term “perpetual bond”, the markets acted as if Alexis Tsipras kissed Angela Merkel’s foot.

Today, oil reversed again, giving up all of yesterday’s gains and then some. It’s down 8% on the day. Equity markets held yesterday’s gains, sticky as usual.

“Time Pressure” Thesis

Let’s return to a statement made by Hans-Peter Friedrich, a deputy leader of Merkel’s caucus: “Greece, not Germany, is under time pressure.”

Friedrich’s statement is one of the following.

  1. Blatant ignorance
  2. Game playing bluffery

I often wonder, “Do these guys really believe what they say? Can they be that ignorant?

As a big fan of Occam’s Razor (the simplest explanation with the least assumptions is most likely the correct one), the answer to both questions would tend to be yes. Why? Because “game playing bluffery” assumes they are telling a lie, doing so on purpose, in belief the other guy will not see the bluff, whereas “blatant ignorance” is a simple assumption.

However, we also have the popular thesis eloquently stated by Jean-Claude Juncker, former Luxembourg PM and former Head Euro-Zone Finance Minister “When it becomes serious, you have to lie“.

Thus, one has to carefully balance these two ideas

  1. Politicians lie, it’s what they do.
  2. Politicians in general are economically illiterate.

From that aspect, it’s very hard to tell exactly what’s going on.

Time Pressure on Both Sides

Unless there is an agreement (someone gives in big time), Europe is headed for a massive blow-up.

I believe Germany has far more to lose than Greece should an exit occur. German responsibility for its share of the debt would be close to €73 billion, Italy €48 billion, Spain €32 billion.

Anyone who does not think that would cause instant devastating contagion is crazy.

That begs the question: Does Merkel really believe Greece does not matter from a contagion aspect, or is that a ridiculous bluff?

For a country-by-country analysis of contagion math, please see Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited.

Game Theory Math Revisited

It still appears as if neither side will back down. Let’s recap my post from January 30: Greece Will Not Accept Bailout Extension or Deal With Troika; Mish’s Game Theory Math

We’re prepared for any discussions at any time but the basis can’t be changed” sets the tone for Germany.

I wonder if the Greek position is on purpose.

Tsipras’ claims that he wants Greece to stay on the euro. That helped get him elected. Is that how he really feels?

If not, then unless he gets nearly everything he wants, Grexit is all but assured. And if no agreement is reached, Tsipras has an easy fallback plan: Blame it on Germany and the much hated Troika.

Mish’s Game Theory Math

  • Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster.
  • If Greece stays in the eurozone, on Germany’s terms, it will bleed to death for another decade or more.
  • Germany and the Eurozone have more to lose than Greece.
  • If Greece exits, the entire eurozone will blow sky high simply because of “exit math”

Exit Math

I wrote about exit math twice recently.

If Germany and the eurozone does not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell.

And that is a position I endorse even though I disagree with many of the overall policies of SYRIZA.

In the end, my analysis says the eurozone has far more to lose than Greece if a Grexit occurs. However, I highly doubt Germany realizes that.

Even if Germany does, it takes unanimous agreement from all 19 eurozone countries to revise the agreement. That’s part of the math.

Place your bets.

Time on My Side

As a tribute to the silliness of Germany’s “Time Pressure” Thesis, I offer this musical tribute.

Link if video does not play: Rolling Stones Time is on my side (1964). That’s a very enjoyable live Ed Sullivan Show video, well worth a flashback memory play.

Time on No One’s Side

Time is not on anyone’s side here. Especially Germany’s. Both sides are under pressure.

When Friedrich says “Greece, not Germany, is under time pressure,” he is either engaged in a dangerous bluff, or he displays blatant economic ignorance.

The same applies to Chancellor Merkel when she claims the eurozone is prepared for a Greek exit.


A Bloomberg View on “Greece’s Hidden Haircut Proposal” just came my way: “By the time the EU is done with the Syriza novices, Greece’s debt may be a little lower, but the government’s radicalism will be a tattered banner,” says author Leonid Bershidsky.

Bershidsky is another in a long line of persons who do not understand simple math. Time will tell who is waving the “tattered banner” over what can and cannot be paid back. My bet, one way or another, is on the alleged “novices“.

Mike “Mish” Shedlock