Grexit-- The Implications Of German Blood Lust

The new Greek government, so demonized by the capitalist media, isn't exactly acting all that revolutionary. As UniCredit put it this week, "Greece has conceded to pretty much 90-100% of what creditors have asked for." As for "creditors," read Germany. And Germany is looking for blood. 90-100% isn't enough. Jeffrey Sachs tweeted the other day that "Germany is apparently pulling the plug on Greece. Remarkable, dangerous, very unwise in my view. And very sad." He sited Financial Times piece, Germany rejects Greek bailout extension by Peter Spiegel in Brussels, Stefan Wagstyl in Berlin and Claire Jones in Frankfurt. Sounds pretty dire:

Germany has rejected a request by Athens to extend its €172bn bailout despite a u-turn by the new Greek government, which for the first time on Thursday promised to work on completing the economic reform measures required by the current rescue programme.

Martin Jäger, a spokesman for Germany’s finance ministry, said the letter requesting the extension, sent by Yanis Varoufakis, Greek finance minister, on Thursday, left too many questions unanswered and did not meet demands by eurozone finance ministers to unconditionally agree the terms of the existing rescue.

“The letter from Athens is not a substantive proposal for a solution,” Mr Jäger said. “In truth, it aims at bridge financing without fulfilling the demands of the programme. The text does not meet the conditions agreed on Monday in the eurogroup.”

The swift rejection by Berlin after what many viewed as near complete capitulation by Athens is just the latest in a series of breakdowns over how to keep the Greek government financed when the current EU programme expires next week.

But coming at the eleventh hour it raises the prospect that Athens will enter March without EU financial support for the first time since May 2010, which many eurozone officials fear will spark market panic and a possible bank run.

Reacting to the German comments on Thursday a Greek official said: “The government sent a letter to eurogroup seeking a six-month extension of the [bailout] loan agreement. Tomorrow’s eurogroup has only two choices: to accept or to reject the Greek request. This will show who wants to find a solution and who doesn’t.”

...Eurozone officials had said a new meeting of the eurogroup would not be held unless Greece had made enough concessions in the last week.

According to a copy of the Greek request obtained by the FT, Mr Varoufakis was seeking an extension of Greece’s “master financial assistance facility agreement”-- the same request that was made by the previous government of Antonis Samaras in December.

At the same time, Mr Varoufakis says in the letter that he seeks to go forward with the bailout only after a discussion on “proposals of, on the one hand, the Greek government and, on the other hand, the institutions”, an indication he was seeking modifications of the bailout conditions before signing up to an extension.

Until now, Greek authorities have refused to accept an extension of the current bailout, insisting the government was elected to end its economic and financial strictures. But a German-led group of eurozone countries said they would not consider a new programme for Greece unless it completed the current one.

Mr Varoufakis’s request came just hours after the European Central Bank’s governing council approved an extension of its emergency funding to Greece’s banks on Wednesday evening on the expectation that Athens and its creditors will reach an extension deal in the eurogroup by Sunday.

Top ECB officials and the heads of the central banks of the eurozone’s 19 members approved a €3.3bn increase in Emergency Liquidity Assistance for Greek banks in their Wednesday meeting.

Maybe the Germans are angry because the Greeks keep comparing the current situation to the brutal German occupation of their country in the 1940s. A senior Syriza politician pointed out, correctly, even if impoliticly, that Germany's current tactics to those of the Nazis, exclaiming "It's like being back in the 1940s, being asked to surrender... Germany has been overtaken by arrogance."

So will Greece or won't Greece leave-- get kicked out of-- ("Grexit") the Eurozone? The Germans seem to think they need to teach Greece a hard lesson, not so much for Greece but to scare the shit out of Spain, Italy and other countries that may want to get out from under their jackboots. A.P. asked what it would cost if Greece did leave.

Economists at Commerzbank estimate the economy, which has already shrunk by a quarter since the crisis started, would contract by another 10% in the first year after Greece leaves the euro.

The new drachma would plunge by 50% or more against the euro as the central bank prints money to keep banks going. That would mean imports such as medicine, autos, and oil and gasoline would skyrocket in price.

On top of that, Greek companies that owe money to suppliers in euros would suddenly find those bills too big to pay, forcing some into bankruptcy. Greek companies that survive might be asked to pay in advance in euros for parts or raw materials, restricting production.

Currency depreciation "would thus seriously lower the Greek standard of living," Commerzbank analysts say.

Locals and foreigners would limit investment amid the uncertainty over the economy's prospects.

Longer term, the picture is less clear. The weak currency would give domestic producers an advantage as imports would be more expensive. Travel to Greece would become much cheaper for eurozone citizens and that could boost demand for hotels and restaurants.

Still, Greece would have lost an important incentive to reform its economy, which is burdened with excessive bureaucracy, regulation, and corruption. And its membership in the EU-- and its ability to trade with the bloc-- might come into question.

Many analysts seem to think the eurozone is now better equipped to handle the departure of one country. It has a bailout fund and an offer from the European Central Bank to buy the bonds of countries that come under market pressure.

Some, like Christian Schulz at Berenberg Bank, think Greece, at 2% of the entire eurozone's GDP, is just too small to drag down the whole currency union. "For no country in Europe is Greece a major export partner," Schulz said.

Stock markets seem to agree. Germany's DAX hit an all-time high last week, despite the Greek rumblings.

Still, the impact is hard to predict, and the stagnating eurozone needs every bit of growth it can get.

And there would be some concrete costs.

First of all, Greece would most likely find it impossible to repay its bailout loans. Those losses would be spread to taxpayers in the other 18 countries.

The eurozone bailout fund is owed 142 billion euros ($162 billion), individual countries are owed 53 billion euros, and the European Central Bank holds 20 billion euros in Greek government bonds. Same goes, most likely, for another 50 billion euros owed by the Greek central bank to the ECB and the other national central banks though the eurozone payments system.

Leaders like German Chancellor Angela Merkel surely do not want to explain to voters how they lost that much on Greece.

But it probably would not lead to donor countries' finances being downgraded, Schulz said: "It would be politically extremely inconvenient, but financially would not make a big difference," he said.

The costs in terms of how people think about the euro are harder to predict.

Weaker countries could pay more to borrow, because investors would have to figure in the risk of euro exit and seeing their holdings devalued by being exchanged into a new currency.

Having lost billions in bailout loans might make the richer countries such as Germany even more determined not to share their finances with other eurozone members in the future.

If Greece bounces back in the years after leaving the euro, that could leaving the euro, that could lead some others to think it is better to not be part of the shared currency union.

Yet the initial chaos would most likely be terrible enough to discourage such thoughts.

Said Schulz: "If Grexit is as bad as we think it is, there will be few who want to imitate it."