Did Germany Just Walk Out?

The Athens crew keeps digging deeper

By Tero Kuittinen

After a prolonged week of drama, Athens finally seemed to accept the terms of the new bail-out package.

Too bad the groom may have walked off from the altar. Germany’s response to the Greek “Yes” has been fairly brutal.

According to Reuters sources, Finance minister Schäuble has told German cabinet colleagues that Greece is still on track to 128% debt-to-GDP ratio in 2020 – a clearly unacceptable level. According to WSJ, Schäuble rejected the Greek deal already yesterday, basically immediately.

The Athens crew keeps digging deeper – Deputy Agriculture Minister Roundoulis resigned from the government today. Deputy Labor Minister walked out yesterday. What is interesting here is that these two represent the opposite ends of the political spectrum. Both a right-wing politician and a socialist have now left the government within 24 hours. “The Greek consensus” – an obvious oxymoron – is unraveling at both ends. A two-day general strike is once again enveloping Athens, scaring off tourists and speeding up the breath-taking retail sales contraction.

The deal that Germany has seemed to reject out of hand may already be too harsh for Greeks to bear. Of course, Greeks probably do not understand that 25% cut in salaries and loss of the bonus months is a lot softer option than what an uncontrolled exit from euro would create. A move to drakhma would mean at least 50%, possibly 70% loss of purchasing power nearly overnight.

Fascinatingly, Schäuble also discussed Portugal today. His precise comments: “If necessary, an adjustment of the Portuguese programme will be prepared”. This would seem to imply Germany is already thinking about a new Portugal bail-out even as it rejects the latest Greek proposals harshly.

Why? Has Germany started thinking seriously about how to insulate the second-weakest European economy from the possible Greek collapse? The openly dismissive reaction Germany has shown on Friday to the Greek “deal” seems to be designed to force Athens to take the plunge and default. Once again, the leaked and public comments of German politicians appear to fit the theory that Germany has given up on Greece, but wants the stricken country itself to pull the final trigger.

The irony for investors here is that Europe is once again back on the brink much more suddenly than anyone anticipated – just after the remarkably strong international sales of Apple, Qualcomm, Caterpillar and McDonald’shave lulled the markets into a state of complacency. Doug Kass made a splash this week by pointing out Roubini’s move to bull camp as a danger sign. There is certain black humor in how confident the investor mood swung just before Friday.