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.
“What’s emerging is that Greece will probably not be able to fulfil its conditions,” Roesler said today in an ARD summer interview. “What is clear: if Greece doesn’t fulfil those conditions, then there can be no more payments.”

The crisis happened as a result of the phenomenal arrogance and incompetence of the European political elites. It is more a failure of government than of markets. However, the mechanism that brought the system to its nemesis was fully in line with the market defects that I analyse in my book. What undermined Spain and Ireland was a purely speculative boom centred on real estate that came straight out of the textbook of financial bubbles; bubbles that modern markets, central banks, regulators, and economists confidently believed no longer existed.

It is the expression of the belief that sheer political will can overcome market forces – and the living proof that it cannot.

So let me get this straight. Europe has been moving heaven and earth for the past two years to prevent a Greek exit. We were informed in hushed tones that a Greek exit would be a disaster for the eurozone. Trichet said that default by a eurozone government was impossible and “unimaginable”, and that such talk was irresponsible. We were told that anglosaxons didn’t understand “Europe”, that our arithmetic and pencilled debt ratios were irrelevant.


My prediction is that Trichet was right all along: a Greek explosion could be a disaster for the eurozone. First of all, Greece owes a lot of people a lot of money: the ECB, the EFSF, the IMF, the European banking system, and all of the hapless depositors in Greek banks. They will all be defaulted upon, with varying consequences. Just because we have all "known" that this would eventually happen doesn't mean that the world won't be thunderstruck when it does.

A Greek exit will be a very big deal with a plethora of known unknowns and unknown unknowns.

For example:
CommentsWill foreign governments freeze Greek banks’ assets and liabilities?
Who will be the receiver for Greek bank branches in London?
How will UK banks view their continental counterparties in Spain and Italy after a Greek redenomination?
How will Greece treat Greek citizens with euro deposits in foreign banks?
Will Greece close its borders and confiscate all euronotes?
What kind of exchange controls will Greece impose?
What will become of euronotes issued by the Bank of Greece? (Note: The identification code letter is Y.)
What will be the accounting treatment for frozen deposits in Greek banks?
How will Greek bank and government bonds be valued on banks’ books?
When Greek default rips a huge hole in the ECB’s balance sheet, will this require a recapitalization (which will annoy the German public)?
What will the Bundesbank’s balance sheet look like after Greece repudiates its TARGET2 liabilities?
How will the ECB treat the Bank of Greece and the Greek banking system after exit?
How will Greece pay for essential imports on Day Two?
If the Greek government loses control, will the army step in, as it did in 1967?
Will European governments have to intervene and purchase at par all Greek assets held by their banks?
How big a dollar swap line will be required by the ECB?
Can the looney-tunes in Congress prevent the Fed from lending to the ECB?
How soon before foreign creditors try to seize all Greek government assets outside of Greece?
When the Greek government and banks are declared in default under English law, what happens then?
Will European banks do business with Greek banks who are in default on deposits and bonds?

We now believe the probability that Greece will leave EMU in the next 12-18 months is about 90%, up from our previous 50-75% estimate, and believe the most likely date is in the next 2-3 quarters. As before, for the sake of argument, we assume that “Grexit” occurs on 1 January 2013, but we stress this is an assumption rather than a forecast of the precise date. Even with the Spanish bank bailout, we continue to expect that both Spain and Italy are likely to enter some form of Troika bailout for the sovereign by the end of 2012.

Why don't they just leave and get it over with already?

Greece is "on the brink" and fast running out of cash, deputy finance minister Christos Staikouras has warned. He told state TV:

Quote Cash reserves are almost zero. It is risky to say until when (they will last) as it always depends on the budget execution, revenues and expenditure [...] But we are certainly on the brink, we did not receive the aid tranche we were supposed to and we have the pending issue of an ECB bond maturing on August 20.

• No one really cares about high levels of government borrowing, It is perfectly natural and acceptable for a country like Ireland to have a debt of 100 billion as long as the interest gets paid and the economy of growing.

Did s/he say 100bn or 100%?

'Cos the national debt is heading for 200bn... how do you like them apples?

The argument was that once there is a deal on bank debt, the underlying debt reduces to c. 100 billion which he said no one cares about once you pay the interest, the economy is growing and the market feels you are good for the debt.

I am just repeating what was said. I do not agree with this. Even in the days of so-called balanced budgets of that slimey ficker McCreevey when there was a small suplus, underlying borrowing was running at around 40 billion and increasing, dwarfing any small surplus.

I was speaking to a European Commission insider over the weekend whose take on the situation was (these are his views and not necessarily mine):

• The Greeks lied to gain entry to the Euro and simply cannot sustain membership. It would be better for everyone, including Greece, if they left. The Germans would take a hit of about 100 billion but they deserve it because membership of the Euro has subsidised Germany.

• The Italians are generally OK except for their series of corrupt governments. They make things and have a real economy.

• Portugal does not have an economy to sustain membership of the Euro. While they did not have a property bubble, they just do not belong and membership of the Euro is affecting their cost competitiveness.

• Spain is in denial about what it has to do to maintain membership of the Euro. Spain has not accepted its losses on property and banks. However, Spain has an economy and can work through any problems if it makes the right decisions.

• No one really cares about high levels of government borrowing, It is perfectly natural and acceptable for a country like Ireland to have a debt of 100 billion as long as the interest gets paid and the economy of growing.

Make of this what you will.

The argument was that once there is a deal on bank debt, the underlying debt reduces to c. 100 billion which he said no one cares about once you pay the interest, the economy is growing and the market feels you are good for the debt.