While a Greek (pre) deal in some format was largely expected this weekend (especially following the unprecedented humiliation of Greece that would allow the Troika to repay… the Troika) the biggest stunner from the past 48 hours was Schauble’s insistence (which as we subsequently learned had been coordinated with Merkel) that either Greece accepts draconian terms which will strip the country of its sovereignty, or it will suffer a 5 year “time out” from the Eurozone.
But while Schauble’s “time out” language never made it into the final documents, its presence alone was sufficient to remind the members of the Eurozone that the monetary union has quiet specific loopholes to push any member out that infuriates the German finance minister. It was also enough for FT’s Wolfgang Munchau to write earlier today that “The Eurozone As We Know It Is Destroyed.”
But why did Schauble insist on this “nuclear option”? For the answer we turn to none other than former NY Fed president (and leaker) and US Treasury advisor and current Warburg Pincus president, whose 2014 memoir Stress Test lays it all out:A few days later [i.e., late July 2012], I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.
Naturally, Geithner who himself is atavistic to debt relief and instead urged the Fed and Treasury to fix debt with even more debt, “found the argument terrifying.”
He adds that “letting Greece go could create a spectacular crisis of confidence, regardless of what Europeans committed to do afterward.”
For now, at least, Grexit – whether temporary or permanent – has been delayed for a few months until Greece violates Bailout #3 and Europe is back to he drawing board. At that point not even fellow debt sinner Italy and France will have enough sway to convince “northern Europe” that bailout #4 is merited.
But the question is: was Schauble wrong, especially when considering the alternative that Greece is now presented with: handing over its sovereignty to Berlin on a silver platter, and an outcome which “leaves Greece in a permanent debt trap, under neo-colonial control, and so economically fragile that it is almost guaranteed to crash into a fresh crisis in the next global downturn or European recession.”
Schauble will get the last laugh yet.
Full article: Why Did Schauble Almost Use The “Nuclear Option” – Tim Geithner Explains (Zero Hedge)