The view from Berlin

…and how EU citizens will pay dearly for it.

Trichet, Lagarde know that eurobank capital adequacy not enough to survive Greek default

The next ‘Troika’ review of Greek progress is due to take place this coming Sunday – the 10th anniversary of 9/11. This will show that the Athens austerity programme is hopelessly behind schedule. Under the terms of Angela Merkel’s agreed pact with her CDU/FDP colleagues struck last Monday, the German Chancellor must pull the plug on Greek monies the next day….triggering a hard Greek default. But she won’t….and it’s not hard to work out why.

In a spirit of truth if not reconciliation, the morning currency note from RBS yesterday said they expect Greece to default in December this year. Other analysts agreed, in some cases referring to default by that date as inevitable. Simple maths support this contention – and most credit sector opinion leaders did them weeks ago, if not longer.

Further down the RBS note, however, having listed the obvious reasons why its opinion is undeniable, the bank slotted in this gem:

‘Indeed, all of these factors apply to the current Sep-11 review’

This was merely supporting what the Forex International site had said the day before: that technically, Greece must default and leave the eurozone ‘within days’.

We already know from several sources secret and published (see yesterday’s second Slog piece) that the Troika review team (EU, IMF & ECB) regard the progess on Greek austerity as risible: as the CDU’s Pomeranian election disaster was unfurling, Troika members told senior CDU and banking figures Athens had failed to make progress on fully two-thirds of the items on the agreed to-do list. Indeed, an independent Greek parliamentary committee of experts last week reported that Greece’s national debt is “out of control”. And even Greek Finance Minister Evangelos ‘It’s all lies I tell you’ Venizelos admitted last week that Greece would miss its target of bringing the budget deficit below 7.6%.

So whichever way you look at it, it’s a done deal: based on Merkel’s domestic pledge, Troika rules – and IMF articles of association – the game ends Sunday. Greece will default.

Except that it won’t. And it won’t, because the EU banking system isn’t ready.

All of which means that German Chancellor Angela Merkel must either break the pledge she gave only 48 hours ago…..or break the eurozone banking system.

A major Frankfurt bank executive has this to say:

“Athens is behind on everything really. A colleague who was there last week tells me he doesn’t believe the Papandreou Government really cares. There is no doubt at all that Greece is doomed….in fact, it will be in default on a number of bases after the [Troika debrief]. But I do not see how Chancellor Merkel can allow this….whatever she has said to Coalition colleagues.”

The source confirmed that the banking ramifications would be horrendous. A Swiss-based Athens credit negotiator told The Slog:

“Obviously, I don’t know about the state of every bank owed a heap of money by the Greeks. But everyone is wary – you only have to look at the mountain of cash being parked in the ECB [Central EU Bank] every night. It’s Lehman again….there is no trust.”

In a typical piece of misleading rhetoric, Frau Merkel told the Bundestag this morning, “The euro is the guarantor of a unified Europe. If the euro collapses, Europe collapses.” None of that is true: we have had a unified Europe without war for much longer than the euro has existed, and it’ll be the EU that collapses, not ‘Europe’. Europe is the real deal……the EU is an egotistical fantasy gone very badly (and predictably) wrong.

Few doubt that Angela Dorothea Merkel believes in the ‘European Project’: apart from anything else, it gives the Germans an artificially cheap currency with which to boost exports. But a true believer in that ideal with no other axe to grind would have kicked the Greeks out months ago…if only in self-defence. A true believer in a totally united Europe would not be asking her legal experts about the ramifications of a smaller eurozone based on a new EU Treaty.

No: Chancellor Merkel will turn a blind eye to Greek default this weekend – even though privately she would prefer to lose Greece and Italy from the zone – because the lenders exposed to Greece in general (and Jean-Claude Trichet in particular at the ECB) have told her that to declare the Athens regime in default now would destroy large parts of the banking system….inside and outside the eurozone. This is partly because market sentiment re Italy is almost as negative as that towards Greece – but mainly because a ‘zero borrowing credibility’ would apply throughout the ClubMeds

In the event of a Greek default, the following would happen immediately:

Every bank in Greece would declare itself insolvent.

The Athens government would nationalise every bank in Greece,  and forbid withdrawals from Greek banks.

A new currency would emerge, devalued cf the euro by some 30-70% .

Most estimates around today suggest that the result for sovereign lenders to Greece would be a loss of around 60+% or more of all Greek euro-denominated debts. At this point, a number of French and German banks would make such losses, they could no longer meet regulatory capital adequacy requirements. The real capital adequacy situation that pertains in Europe is precisely the reason why Christine Lagarde had such an epi at Jackson Hole the weekend before last.

Lagarde, of course, has known about the inadequacy for months. But it wasn’t until she got the full IMF strength on Greek ‘progress’ under the bailout terms that she grasped the urgency of the situation: hence one of the great volte-faces in financial political history. (Lest we forget, EU-wide stress tests Lagarde oversaw in July did not build in the impact of a Greek default. Imagine that.)

“Turmoil in the sovereign debt markets and uncertainties about banks’ capital adequacy and future resolution regimes for failing banks have eroded market confidence, increased wholesale funding costs, and blocked market access for some banks,” said S&P’s Andrew Hinckley yesterday. As long ago as last May, the Wall Street Journal blog noted:

‘…Politicians can’t bear the near-term economic pain associated with a proper clean up of the banking sector. So they allow banks to hide some bad assets and to inflate the value of others. They allow bankers to divert profits that should be going towards rebuilding their balance sheets into employee bonuses instead. They conspire with bankers to give the illusion that something is being done when in reality very little is being done. And they relax rules….[so]….News that European regulators could allow their banks to avoid strict capital-adequacy rules shouldn’t come as too much of a surprise.’

An extremely prescient piece: because this is exactly what has happened.

Even if there might be just enough capital adequacy to go round in the eurozone, the private ECB view as expressed is that “any other debtor State’s ability to borrow money would disappear overnight”. Italy in particular would probably default whether Brussels liked it or not.

This is why Merkel will put her blind eye to the microscope on Sunday. But that doesn’t alter the fact that the eurozone banks have just three months to sort out a problem which, as usual, they display no interest whatever in solving. And the bottom line of that is as follows:

* EU taxpayers are going to chuck money pointlessly down a Grecian toilet in order to save the banks now.

* They will then be asked to cough up when the banks fail through poor capital adequacy ratios.



  1. Doesn’t this post imply that your earlier statement, “Greece Euro Exit Eminent”, no longer holds?
    Do you expect Greece to remain in the eurozone until December?


  2. Thanks for the real news John, the only trouble is that when I read snippets like this:
    “They allow bankers to divert profits that should be going towards rebuilding their balance sheets into employee bonuses instead. They conspire with bankers to give the illusion that something is being done when in reality very little is being done.”
    Privatize the profits Nationalize the losses. This is not Capitalism. Grrrrrrr


  3. ‘A colleague who was there last week tells me he doesn’t believe the Papandreou Government really cares.’
    Every municipality within a dozen mile radius of me is rebuilding its town centre, two of which started AFTER Portugal was bailed out. We are getting a brand new road between Coimbra and Tomar (90km) and a local railway line has been ripped up and is being relaid ‘because the guage was wrong’.
    The PIIGS politicians really are taking the piss and at the same time they have slapped an eye-popping 23% VAT (from 6%) on electricity and gas.
    Poor people will be in fuel poverty while the rich construction guys (and politicos/bankers) get richer. I sense revolution in the air.


  4. I for one am at a total loss as to why the Greeks aren’t jumping to the Germans orders on how to run their economy and live their lives. Perhaps their good friends the Turks might like to put their two bobs worth in as well. Certainly if I was Greek I am sure I would be writing a personal letter of gratitude to Frau Merkel for her suggestion that I live in poverty for the rest of my life so the nice folk in the Banks of Germany can continue to buy a new Mercedes every year.


  5. Helmut and Helga in dem strasse will surely remind Angela that politics is the art of the possible: an independent German central bank could use German tax payers’ money to support German banks(cf.1974 and 2008 in the UK),to cover the losses on Greek and Italian paper.How can it be politically possible to chuck more German money down the drain to Clubmed?There will be a new Deutschmark.


  6. Given that surely at least a few of those with “THEIR OWN” money in the banks likely to be worst affected by a Greek default might think to pull their money before there is none left in the vault might it just be another “Northern ROck” style run next week somewhere in Europe


  7. John, I wonder if it is worth expanding on your last comment: “EU taxpayers will be asked to cough up when the banks fail…….”.

    What do you think that would mean in practical terms in France, the UK, Germany and Spain?

    Rgs, D.


  8. Does anyone here agree that this whole debacle and the pantomime that follows it in every publication and news report , is just a smokescreen for illuminati conspiracy? Just interested thats all!


  9. I’m sure the Greek exit will be eminent, but I recall only saying it was imminent. By law, it should be.
    The question is really whether Merkel would rather break a promise or break a system.
    Have to hurry you….


  10. One of the unknowables, it seems to me, is the grass-roots political reaction to all this within the worst-affected of the peripheral countries. So far, among most people in the periphery, there has been a gloomy acceptance of the need for austerity: the “riots” in Athens, though noisy and sometimes televisual, haven’t involved what I would call the mainstream Greek middle class, and the same is broadly true of the indignados movement in Spain. In all of the countries concerned, the acceptance of the austerity programmes has been mirrored, by and large, by cross-party agreements not to rock the boat.

    But if austerity begins to bite really hard, this mood could well begin to evaporate. If mainstream opposition political parties were to respond to growing unease by playing the nationalist card, and if nationalist protests were to include attacks on rapacious and exploitative banks, quite suddenly things could get very embarrassing for pro-EU establishments. Imagine what the reaction might be in Berlin if a Goethe Institute were to suddenly go up in flames, or if visiting German dignitaries were to be badly jostled in furious protests.

    So far, relatively small student and anarchist protest movements apart, public feeling in the debt-laden peripheries has been surprisingly quiescent, and this has helped the EU, the ECB, and the IMF to behave as though ordinary people don’t exist in the countries concerned. But there is a limit to the tolerance of people who are being pauperized, and that limit could be reached sooner rather than later. At that point, look out – and watch the pompous “policy makers” hurriedly diving for cover.


  11. Cronshd
    To be honest, I’m not entirely sure. I have not the slightest doubt we will be ASKED to cough up again….but I doubt this time whether we will. I have thought for a month or two now that there may be a form of European Spring…especially in the ClubMeds.
    In practical terms in the UK, there IS NO money to bail the buggers out this time.


  12. “It is a matter of utter shame that similar is not being reported in our mainstream press.”
    That for me is the single most depressing part of this crisis. It has been left to those that ask questions to find the real news and debate online with Blogs such as these.
    The Internet Revolution?


  13. Yes, seems to be a sound analysis.

    The interesting point is what is the limit which will cause the middle class to be infuriated by their pauperisation. No sign of it in this country yet, despite those on fixed incomes being crucified by the decline in their income and real wealth-inflation ripping!

    (so no counter argument from me either!)


  14. Never underestimate the power of the UK Credit Card if the Camerloons get to wield it on the world stage and get a smile for the Camera opportunity !


  15. I feel sorry for the Greek people however – they are probably being told in their MSM that Merkel has agreed to bail them out indefinitely. Whilst really they should by now be withdrawing their cash from every bank – going to Germany and buying (swapping to) German Euro’s with it to protect themselves. There are going to be a lot of heavy losers (among those who can least afford to lose it) in the short to mid term.
    However – the return of cheaper med holidays will help them recover and enable them to re-establish their taverna (and holiday) industry.


  16. Good point, but Greece is being battered far more brutally than is the case with Britain. Greece’s GNP could shrink by between five and eight percent in the coming year, largely as a result of the “punishment” being meted out by the EU-ECB-IMF with the enthusiastic support of Germany and like-minded countries to the north. Nothing remotrely as severe as this has befallen Britain – not yet, anyway.


  17. @ Morningstar

    “the return of cheaper med holidays will help them recover and enable them to re-establish their taverna (and holiday) industry.”

    A little optimistic, I feel. Things have changed in the tourist industry over the last 20 years, and the cheap Med has not been able to compete with more distant destinations such as the United States, Australia, Malaysia, Bali, the Maldives and so on. Taverna holidays, sadly, are increasingly a thing of the past, unless you’re a teenager keen on getting legless on cheap booze. And if you’re really keen on taking a holiday in the Med, Turkey (outside expensive euroland) is in most respects far better value than Greece.


  18. For what it’s worth, I’ve had some excellent sunny holidays with beautiful sandy beaches for the kids in Jersey, Guernsey and Gibraltar – neither of which requires you to change your money (though don’t expect to be able to spend the local banknotes you get in change when you get back to the UK – cf Bank of Scotland notes).


  19. If only!
    The choice between the local socialists and social democrats in recent elections in our Portuguese village bore little relation either to ideology or revolution. If you voted for the one, you were rewarded with a ‘gift’ of €25, if you chose the other, your reward was half a pig.


  20. What a thoroughly interesting article, and not for the first time, thank you Mr Ward. A very powerful illustration as to why politicians have done (or not) what they have (or haven’t) about this crisis… and sadly why the taxpayer will again, and again, get the short end.


  21. Fascinating two articles John,well up to the mark. There are some of the people replying to your articles, who wonder why the general public. are not articulating more to the events happening. One answer is the BBC,who have admitted that they are biased towards the EU,and throw out a barrage of propaganda,to this and other countries. People in all countries are dumbed down by television, broadcasting 24/7,with soaps,quiz shows, talent shows,giving the general public no brainers,with very little information on finance,or politics. Ask the average Joe in the street,whats happening to the Eurozone or America,and I guess the reply would be, dont know, dont care But dont was made to care as they will find out..


  22. I remember (learning about, not experiencing) a previous occasion when the middle classes were pauperised…

    It was during the Weimar Republic…

    It brought to power a certain Herr Hitler.

    History does repeat itself – our capacity for self-delusion and not learning from the past is still incredible…


  23. As if to back up Johns rant on the banks,go to Zerohedge. Read what the FEDs been doing secretly for at least the last 5 years,courtesy of Bloomberg. It covers banks in the US and Europe. Then you will be scared!!.The article is called.A raging case of bailout fatique.


  24. Yes, the lack of interest shown by the people in what is really happening is frightening, and television seems to be the main means of control.
    If I were a conspiracy theorist I would suggest that the destruction of decent state education was intentional! (ha ha).


  25. Bank of Scotland notes are LEGAL tender. As is Bank of Belfast notes :To suggest otherwise is wrong. Or were you being an idiot?
    Sadly the ‘cheap med’ has become a uk ‘fugz playground’. And now even more worrying: if they can’t afford a police service where will that end up?
    My money is still on merkel renaging on Greece, and letting it go, and Greece showing the bird in return.


  26. Yes… and the BNP AND EDL are waiting in the wings. The politicians were warned that the people were not happy- they chose NOT to listen, indeed they are responsible for the rise of these groups. This time it’s not the Jews: it is the Muslims…but then it will be the jews followed by… anyone else they don’t like the look of ie you and me perhaps?

    Quote word from Don Mclean song ” they were not listening” they’re not listening still- perhaps they never will”


  27. If you intend to default, you might as well do so on a biblical scale.

    The rewards for trying and failing are worse than those received for taking the piss.
    If you take the piss, youre locked out of the capital markets for years, but you spent so much up front, its not a catastrophe.
    If you try and repay the unpayable, you still get locked out of the capital markets, and the roads you neglected bite you in the arse.


  28. Don’t expect anyone south of Berwick to accept a Bank of Scotland note – at least not without them asking if you’ve got a Bank of England one instead.

    Doesn’t matter if it’s legal tender, people just want to avoid the potential hassle.


  29. William
    The losses are too big.
    Thats the problem.

    When Greece writes off 70% of the debts it owes to German banks, those banks will imediatly become insolvent, the depositers will rush to withdraw their money, which obviously, wont be there, they will turn on the German government, and demand their insurance. This might, just about, be possible.
    But when Greece goes down, it will bring down the rest of club med with it.
    When Italy says, I’m only paying back 30c on the E, the German government couldnt possibly manage the deposit insurance costs.
    One after another after another, banks will topple, depositers will lose everything and demand the government reimburses them, governments will fall in response.


  30. “Legal Tender” only applies to settling of debts.

    They cannot be refused after a meal has been eaten, but they can be refused at a mcdonalds where you pay befotre you eat.


  31. Go to any HSBC Premium branch and you can desposit Scotish, Manx, Channel Island notes to your English account. Not sure about Gib notes in the machines but you can exchange them pound for pound with the cashier. In any case, unless you are a collector, there is no need to bring them home, the banks in Gib and the Channel islands give you the choice of English or local bank notes at their ATM machines.


  32. It is ominous that with all this ‘certainty’ re the demise of the Euro the pound is so weak against it and the Dollar.

    As the UK is dependant on foreign money and has very Foreign Reserves it my become at the very least collateral damage to a currency crises.

    What does the near 5% drop in gold mean?


  33. It was! What government wants a well educated informed critical thinking public. That would be a threat to their power over us.


  34. The UKs policy has been quiet devaluation against the EURO and Yen
    We’ve managed 50% over four years against the yen, sky hasnt fallen yet, I see little reason we cant do another 50% over the next 4

    We’re down 0.2% on the dollar over 10yrs, we’re up 3% over the year.
    Floating currencies are supposed to float to correct trade imbalances, Sterling SHOULD fall against people with whom we have a trade deficit, rise against those with whom we have a surplus, and the economy should adjust to deal with it.

    Understanding is a three edged sword.


  35. Methinks you’re describing a scenario whereby the German government defaulted on its deposit insurance scheme. If that happened in the UK, it would probably be the one thing that brought about serious civil unrest, coupled to a very widespread refusal to pay taxes. In fact it would likely spell the end of our system of government.


  36. There was a time earlier this summer when middle aged and older people were involved in the protests in Greece, and they would bring their kids and their grandkids. Then there were the two days of the vote in Parliament for the new “bailout” package and accompanying austerity measures. During the days of the vote, out of nowhere, appeared the usual suspects whose faces are covered and who throw molotov cocktails and are in riot mode. Curiously, they are never arrested. They gave the police the excuse to throw massive amounts of tear gas and to beat non-violent protesters as they were fleeing. I am viewing this from outside of Greece, but I would say that the police brutality effectively destroyed the involvement in the protest of those not young and strong enough to risk these kind of attacks in order to protest. It was truly a shame.


  37. And here we are, four months on and €billions spent, and the Troika are still trying to find a solution to Greece. The only reason for this is that the unelected crats within the EU/IMF/ECB don’t want to abandon the euro or kick Greece out of it.


  38. Pingback: CRASH 2: ‘Italy has asked out of next Greek bailout tranche’ – sources. | The Slog

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