STAND-OFF IN ATHENS: How a local negotiation turned into an international battle for survival.

As I struggled along with most other observers to work out just WTF had gone wrong in Athens last Saturday morning, The Slog’s only reliable source finally surfaced to say a thing or two. In the time since then, I have been trying to piece together what happened…with the help of the Bankfurt mole, and sources in Washington and Paris.

“This thing was snatched from our grasp yesterday [Friday] afternoon,” the Athens negotiator told me, “and removed to a much higher sphere. It could be that the EU finally grew some balls.”

The detail of what seems to have occurred must remain as conjecture until somebody writes a book about this saga. What’s clear is that last Friday around lunchtime, a deal had been reached for some low-start new bond issues, followed by later-maturing ones at a higher rate. In return for a 70% haircut by the lenders, the rate average of all the bonds to be issued was 4.25%. The legal beagles went away to write it up amid cautious handshakes. At which point some Troika heavies made an announcement: nope, the average had to be no more than 3%.

That was a big difference. But this wasn’t the Greeks making the demand: it was the IMF, the ECB, Berlin, a bit of Paris…and just a hint of Wolfgang Schauble – the all-time believer in default within the EU.

Somebody somewhere had decided that the time was right for a power play. Major offloaders of March-maturing bonds had been French and German banks in recent months….with targeted help from Draghi’s ECB. Whether this was a trap deliberately set by Draghi I couldn’t say, but either way its effect has been to leave Paris and Berlin considerably less exposed to Greek debt than previously….and the Hedgies holding the baby. By Saturday lunchtime, it had dawned on the key IIF movers that a point was being made from the top: “OK punks – let’s see what you got”.

Significantly, Merkel, Lagarde, van Rompuy and Barroso held a pow-wow in Berlin yesterday afternoon. There is a growing feeling that the EU ‘management’ now feels it is ready to face a default inside the eurozone. The point – and for once, it’s a sensible idea – would be to say to a frightened world, “Look – we rode a default, and won”.

If correct, this vindicates all those who have said from the start that Merkozy was simply playing for time with both the Greeks and their creditors: that once the banks had been sandbagged, they would turn round to the bondholders and say, “OK – do your worst”. It is an enormous gamble. If pushed too hard by their bondholders, Iberia and Italy might give up and default too; and that would make the euro too toxic to survive. But the opinion being followed is, “If we win in Greece, the lenders will back off in Spain”.

The Slog’s Frankfurt Maulwurf seems fairly happy at the turn of events. Here’s his version:

“Chancellor Merkel has come under enormous pressure in recent weeks from the German banking community, and also from her own [CDU] colleagues. The advice has been clear: unless we stop somewhere, the problems will go on and on and cost more and more – with only Germany left standing. There can be no doubt that Signor Draghi has helped in this regard….he has influence with [Merkel] and also he is more proactive than Trichet was in providing financial support in the right places. For the first time now, we see those trying to take advantage of our situation on the back foot. This can only be for the good of all Europeans”.

We have to remember in all this that our Bankfurt friend is very much a hawk in the ‘keep the EU affordable or walk away from it’ tendency. He is also firmly of the view that FiskalUnion is central to that:

“Where Draghi’s influence has been crucial is in keeping the French from diluting the rules of the Fiscal Pact.  He is totally in accord with Frau Merkel on this. There is no doubt in my mind that the eurozone is in better shape to face the future than it was before Christmas”.

Whether that is really true remains something about which I’m deeply sceptical. Although Charles Dallara of the IIF continued to make nice noises from his appointment in Paris, some of the creditors involved in Friday’s shock-and-awe moment were talking about “drawing a line in the sand at 3.8% and saying take it or leave it”.

“I heard two guys say on Friday, ‘this is a deal-breaker’ – and they meant it,” says my Athens source. So we really do have a stand-off, and from here on it is the classic ‘who blinks first?’ situation. Early today I had input from Paris. I will give you the key paragraph:

“It isn’t just about the EU’s strength, it is also about the hopeless position of Greece. Their economic data gets worse by the month, and so the mountain they must climb gets steeper and steeper. Any expensive deal in Athens would simply be a stay of execution.”

But then – much as I love him – that source is a French diplomat. My feeling remains that the Brussels view on Greece is they are a concern only so long as they are a liability. And I still feel – no, I know – that only a 100% write-off of all its debt today (followed by an immediate injection of economic stimulation) would give the Greek People a fighting chance of survival within the single currency. Clearly, that isn’t going to happen.

“The elements of an unprecedented voluntary private-sector involvement are coming into place,” puffed Charles Dallara to Bloomberg yesterday. As Eric Morecambe might have said, “We have all the right elements…just not necessarily in the right order”.

32 thoughts on “STAND-OFF IN ATHENS: How a local negotiation turned into an international battle for survival.

  1. Franco German proposals to dilute Basel III indicate that a Greek default has been presumed for at least 2 months, and everything has been about buying time and protecting Franco German banks

  2. A very interesting piece, thanks JW.

    Major offloaders of March-maturing bonds had been French and German banks in recent months….with targeted help from Draghi’s ECB. Whether this was a trap deliberately set by Draghi I couldn’t say, but either way its effect has been to leave Paris and Berlin considerably less exposed to Greek debt than previously….and the Hedgies holding the baby

    I mentioned that the Dutch bank ING had sold most of its Greek holdings last week (with a link to the published article). The going rate for Greek bonds was 30cts. last week. My thoughts were running in the same direction as your mole on this one.

    If a few hedgies get caught out on this, then it will have been worth it. Getting rid of a few highwaymen from the arterial routes of finance will do no harm whatsoever.

    • If a few hedgies get caught out on this, then it will have been worth it. Getting rid of a few highwaymen from the arterial routes of finance will do no harm whatsoever.

      There may be an element of alligators and swamps here. I’m comfortable with hedgies getting burnt but to me the end objective is getting rid of the EU. The starting point for that has to be severe damage to the euro as it stands. This may not do that.

      • “The starting point for that has to be severe damage to the euro as it stands. This may not do that.”

        No, it will protect the euro. The hedgies forced the eurozone to defend those inside it. Outside the eurozone you get ripped to shreds by the very people who wantedd the eurozone smashed. In trying to smash it, they made it stronger. Now they will be hoist with their own petard.

        The hedgies should not have used a battering ram. They should have used a pebble and a sling.

    • The ECB and the german taxpayer will be taking the ultimate haircut, and rightly so. Then we can close down the unelected highwaymen in brussels which will do the continent of europe a big favour.

      • @Tigger

        if you read JW’s comment carefully, you will see that they already have taken a massive hit – though at a controlled 30%.

        The alternative was for Germany’s taxpayers to fund ever increasing amounts of interest to the banks.

  3. I still think there is a lot of debt hidden away, EBA estimates of the banks solvency, have been a common joke, nobody has properly audited any banks & they are all using mark to model rather than mark to market. I think I am right in also saying that Spain’s property bubble is yet to have it’s full impact. Lot’s more fun & games ahead I think.

    I’v always had a soft spot for this guy, the only Irish journo out of the pack who isn’t content with just playing the game. I remember Vincent annoying the hell out of Brian Cowen for having the cheek to ask real questions. VB was turfed off RTE, the Irish equivalent of the BBC, no surprise really.

    http://globaleconomicanalysis.blogspot.com/2012/01/irish-journalist-hounds-ecb-official.html

    • Watched it on youtube, very funny and very poinant. The ECB highwayman and his harpie spokeswoman were not impressed. Their best tactic would have been to tell the truth:

      “yes we’re here to rob you, what of it?!”

      • @Tigger

        it was a typographic error you prat.

        I have informed the author by email so that idiots like you don’t start howling with laughter again. Goodness, dealing with guys like you is like being in the front of a classroom of adolescent boys.

        If you read the rest his article you might – just might – have learned something useful. Sadly, that is unlikely.

      • @Tigger

        and what do I think of silly stuffed toy animals?

        Goodness, if you were a real tiger I might start thinking … but then you might be ready to be scratched with razor sharp claws because you would have your own.

    • I owe you an apology. The article quoted is a spoof, but the Austrians have a very gentle sense of humour.

      Well, I hope you didn’t take this seriously! Or am I just real slow in
      catching up to your humor? The date, of course, was supposed to signal that this was only a satire, albeit a satire which I, for one, would wish that it
      comes true (also in the interest of the Greek people because without first a
      “real awakening” there simply won’t be any preparedness to accept reality).

      Dear Klaus Kastner
      thankyou for your email.
      [..]
      In short, your satire was too close to the dreams of many [me] to be taken
      as a satire – now had it been a default of 120% that might signal a
      question mark in most heads. Negative bond rates in Germany were a big
      enough puzzle for many in the English media to understand – a
      “negative default” might just do the trick. After all, people would
      then be paying Greece to stop the nonsense.

      • “The article quoted is a spoof, but the Austrians have a very gentle sense of humour. ”

        As we know from previous experience, you don’t do ‘gentle’, do you?

        “I owe you an apology. ”

        You have avoided being specific, is this addressed to Tigger or Sloggers in general, or both?

        I only ask, you understand, because if someone is going to set themselves up as the world authority on all things it would probably be an advantage if they actually were, on something.

        No offence intended you understand, you may well be, but if I am going to be lectured to on a daily basis, several times daily in fact, I don’t think it is unreasonable to know the credentials of the person lecturing. You know what I mean, allowing us to ‘assess the assessor’ etc.

        One of the reasons JW is such a joy to read, is the complete lack of arrogance or lecturing in his Blogs.

      • @Jwoo

        thankyou for the kind remarks that you put to one side before answering me.

        If you are familiar with my commenting style, which given your comments you are not, you will see that if I address one person, I usually infer that with their name at the beginning of my comment. I think even you have enough intelligence to understand that much.

        I am very sorry that you are insulted by my seeming arrogance, it is equally sad that you are incapable of accepting an apology with the sincerity in which it was given.

        With such understanding as you are gracious enough to allow me, is it any wonder that there is no space for gentleness in my life.

      • Indeed, that being so, you might like to consider that “it was a typo you pratt” addressed to Tigger, actually does require more than a vague, self excusing apology such as ‘it weren’t me guv, they’re a funny lot over there in Austria you know’.

        Knowing your style is one thing, excusing it is another.

        But you should be reassured by your consistencty, that even when responding to valid comment, you haven’t yet failed to meet your standard response of calling into question the intelliegence of the author of the comment.

    • They will ‘encourage’ pension funds to invest in Government infrastructure projects (and then excite the masses to the ‘rip-off’ that the fees/charges are going to pension funds aka PFI contract saga here in the UK).
      These people (LibLabCon) really do think that your money/wealth is theirs and if you have accumulated some then you deserve to hand it over in the name of ‘fairness’

  4. I still feel – no, I know – that only a 100% write-off of all its debt today (followed by an immediate injection of economic stimulation) would give the Greek People a fighting chance of survival within the single currency.

    I don’t agree but it depends on what timescale you have in mind. The only real solution for the long term prosperity of Greece is for it to leave the EZ (and several other countries too) or for northern members to begin ongoing huge fiscal transfers. But I would not see permanent welfare as a sensible solution.
    Reason: the issue of differential levels of productivity across the EZ can not be solved by debt write-offs, forgiveness or anything else.

    See this interesting article posted by ‘marcjf’ yesterday:

    http://seekingalpha.com/article/321072-europe-staring-into-the-abyss?ifp=0&source=email_the_daily_dispatch

  5. Pingback: Fausty's Libertarian Blog: "Nobody ever lost money lending to the … | Money Lenders Singapore

  6. But, but, but what makes you think the Bundesbank want to save the Euro? Why would they want that? From their point of view they were forced to share their DeutchMark with the French as a quid pro quo for re-unification. Now they have got that sorted they want their currency back.

    When will the other silly, silly, silly people in the Eurozone realise this and give the Bundesbank what they want by booting Germany out?

  7. Greece leaving the EU and defaulting will not lead to Greek prosperity. Greece has defaulted on its sovereign debt 8 times since its independence from the Ottoman Empire.
    Unless there is a far reaching cultural change in Greece, the recurring cycle of default will continue amidst relative economic poverty.
    If Greece stays in the EU, there will have to be a transfer union to continue to prop up the Greek economy to avoid this cycle.
    Cultural change within a society is a very difficult process and the tragedy is that the Greeks are in a currency union where they have a completely different cultural orientation to those who are driving the union. As a result they cannot compete economically and cannot change culturally to allow them to compete economically. This is why they should not have joined the Euro and continued membership will result in continuing misery.
    As for the Hedgies, I would not dismiss their ability to cause a problem just yet. They appear to have a blocking stake in the UK jurisdiction bonds, which means it is a lot more difficult to strip bondholders of their contractural protection, when compared to Greek jurisdiction bonds.
    If the Troika + Greece do go down the path of stripping the Greek jurisdiction and the UK jurisdiction bond holders off their contractural
    protections the victory will be ‘Phyrric’ as investors realise that any legal protection in European government bonds is not worth the paper it is written on and therfore price accordingly.

  8. Pingback: BREAKING: 27 EU COUNTRIES MET RE ESM…17 AGREED IT, FINLAND INSISTS ON 85% APPROVAL FOR LENDING | The Slog

  9. Pingback: GREEK DEBT TALKS: support grows for Slog theory that Troika ready to call lenders’ bluff | The Slog

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