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Greece is sacrificed to save the euro zone

26 September 2011 / 12:09:25  GRReporter
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Greece is sacrificed to save the euro zone

Germany's secret alternative plan (Plan B) of the debt crisis and the secret debate held at the government core on the option to abandon the contract of July21 is lays down dangerous terms for Greece. The cross-information makes is clear that it is not certain that the interests, motives and objectives of Athens and Berlin match in case the debt rescheduling turns out to be inevitable. Reliable sources say that the government has not understood that the line between "controlled" and "uncontrolled" bankruptcy and between "bankruptcy in the euro area" and "slipping beyond it" is dark and uncertain, and if the control is lost, the subsequent events will not be favourable to Athens. However, the agreement of July 21 remains valid and its implementation, which follows the slow European procedures, is still considered the safest choice for Greece and the euro area.

Wrongdoings in the negotiations with the Troika take away precious time from Greece, forcing the state machine to operate in conditions of "controlled strangulation" and confirm internationally that in case it is unable to implement a simple program to stabilize, the country will choose the final solution of default. However, the agreement of July 21 remains in force. Markets prefer it to bankruptcy. Replacement of bonds (PSI) give private creditors security, since the new bonds they will acquire will have stronger (European) security.

"Controlled bankruptcy"

Debt reduction amounting to 21% was reached after negotiations that lasted for weeks, and defined the conditions of creditors’ "voluntary participation" in the exchange program. The agreement of July 21 is the only "controlled bankruptcy" as the voluntary nature of the exchange "allows" losses without activating the risk premiums and without making the Greek bonds unsuitable as a pledge given by the banks of the European Central Bank to restore liquidity. A greater reduction of the public debt would cancel the voluntary nature; it would be equal to a controlled bankruptcy and would lead to the failure of the banking system.

July 21 took out the rescheduling of a public debt within the euro area out of the box of "prohibited acts”, acted as a catalyst for increasing the interest rates on loans to banks and countries, as markets previously estimated future rescheduling of public and bank debt, and decided to raise the expected costs in advance. If the agreement of July 21 is replaced with the Greek debt rescheduling by 50%, then the international sources of capital will again revise their estimates of investment risk, the spreads of countries and banks will increase and lead to freezing of interbank lending arteries and to acute liquidity crisis similar to that of the 2008 autumn.

Therefore, the general belief in the European decision-making centres is that the contract of 21 July will be enacted by most parliaments of the Member States (9 is enough). It will be completed, because except for the Greek forecasts, it equips the euro area with a powerful temporary mechanism able to interfere with bond markets and to overcome crisis with public debts, such as the one pending in Italy and Spain, and crises with bank debts, as the one that threatens the French banks.

In short, if the agreement of July 21 is not implemented through the fault of parliaments, then the euro area will have no simple tools to stabilize the European system. The conclusion is that the spread of the crisis in the euro area caused by the agreement of July 21 makes its implementation even more necessary. However, this is only the one side of the coin.

The classified report

The other side of the coin is that the agreement of July 21 will be implemented, but it is not sure that this part which refers to the replacement of bonds will start on time. The spread of the crisis may change the priorities of the temporary mechanism because the procedure for the replacement of bonds is complicated, complex and long. The statement of the German Finance Minister Wolfgang Schäuble in Washington on the "revision" of the contract increased the uncertainty. Sources close to the government believe that a possible failure in the replacement of bonds may cause capital flow out. If the euro abandons the country, then the country will abandon the euro. To prevent such a possibility and to be able to respond to the uncertainty that will occur in case of failure in the replacement of bonds secret meetings in the Ministry of finance discuss the "last temptation" – reducing the debt by 50%.

According to reliable sources, it is the classified report, which the partner of the law firm Cleary Gottlieb Mr. Lee C. Bucheit, appears to support in his contacts with the Greek government. Before engaging with Greece, that law firm has advised many governments on rescheduling their debt and always supports the option for large cuts.

There are talks that this option fascinated the Minister of Finance Evangelos Venizelos. At first glance, it seems attractive because it represents "a major political initiative" with "heroic elements" – it frees Greece from the shackles of debt! This option is only feasible provided that the euro zone and the European Central Bank confirm that they will take the painful losses and will provide (in an unspecified way yet) support in terms of liquidity of the banking system, full of failed bonds, so that the country remains in the euro area.

Tags: Debt crisisEuro zonePlan BWolfgang SchaeubleControlled bankruptcy
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