The Corner

Tick Tock (Louder)

German vice chancellor Philipp Roesler (he’s from the FDP, the junior partner in Merkel’s coalition) is coming to grips with reality.

Via Bloomberg News:

German Vice Chancellor Philipp Roesler said he’s “very skeptical” that European leaders will be able to rescue Greece and the prospect of the country’s exit from the euro had “lost its terror.”

Roesler, who is Germany’s economy minister, told broadcaster ARD that Greece was unlikely to be able to meet its obligations under a euro-area bailout program as its international creditors hold talks this week in Athens. Should that be the case, the country won’t receive more bailout payments, Roesler said.

And then there was this (posted here yesterday):

 AFP – German Foreign Minister Guido Westerwelle ruled out any renegotation of Greece’s budget austerity programme in an interview published on Saturday.

“I see desires emerging in Greece to renegotiate and substantially question the country’s obligations to carry out reforms. I have to say simply, that will not do. It is a Rubicon that we are not going to cross,” Westerwelle told the daily Bild…

And central bank geeks will have noted this:

(Reuters) – The European Central Bank turned up the heat on Greece on Friday ahead of a review of its bailout program, saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least until after the review. The ECB move, which analysts said was aimed at stepping up pressure on Athens to adhere to the commitments of its EU/IMF bailout, will force Greek banks to turn to their national central bank for Emergency Liquidity Assistance (ELA) funds. Those funds will be more expensive than funds available in the ECB’s regular liquidity operations.

Where this is all going remains anyone’s guess, but this Roger Bootle piece from the Daily Telegraph gives a few guidelines as to how it could: spin out: Here’s an extract:

At the point of departure, the Greek government would need to declare a conversion rate from euros into drachmas. What should it be? I suggest the new currency should be introduced at parity with the euro. Where an item used to sell at €1.35, it would now simply sell at 1.35 drachmas. This would promote acceptance and understanding throughout the economy.

In the run-up to exit, controls would be required to prevent capital flight and a banking collapse in Greece – this is not some hypothetical problem. Greece and Ireland are already seeing huge contractions in their money supply as a result of deposit withdrawals. Accordingly – and in particular, from the announcement of the redenomination until banks were able to distinguish between euro and drachma withdrawals – banks and cash machines would need to be shut down…

After leaving the eurozone, it is inevitable, and necessary, that the new currency fall sharply to restore the competitiveness that has been lost over the past decade or more. Greece and Portugal require a depreciation of their real exchange rate of about 40pc, Italy and Spain about 30pc and Ireland about 15pc.

It’s worth reading the whole of Bootle’s piece (but note that, since the restructuring of Greece’s sovereign obligations earlier this year, a large slice of the country’s debt is now governed by U.K., rather than Greek, law, making its redenomination into drachmas much trickier than would otherwise have been the case — which was the idea).

Could be an interesting week ahead . . .

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