The Euro at a Tsipping Point: Greece Gets a Yellow Card, Not Yet a Red, As Merkel's Bluff Gets Called

As expressed (and predicted) in this blog several months ago, if I owe you 240 euros, it's my problem, but if I owe you 240 billion euros, it's certainly your problem, too. Germany's Chancellor, Angela Merkel, certainly doesn't want to admit this, but it turns out that she made the Greeks an offer they could refuse, and now she has to face a choice that she thought she could avoid.

We are, of course, assuming that Merkel is functioning as the CEO of the eurozone. The Germans still get the Dutch to do their dirty work for them (Greek vote result "regrettable"); likewise, the "leadership" of the EU's finance ministers council never acts without Merkel's implicit OK; and similarly, the European Commission's President Juncker seemed to function as Merkel's hand puppet when it came to the Greek vote.

Not quite so for the IMF, led by Frenchwoman Christine Legarde. She was willing to let the IMF advance a case for at least an acknowledgement of the need for a Greek debt restructuring as part of any agreed bailout "package"--something that remains anathema to Merkel and her "orthodox" set of bankers and politicians, who apparently are still trying to prove, by way of their Greek petri dish, that Hoover, not Roosevelt, had the right solutions to a depression.

Although Legarde's IMF gets the largest share of its funds from the United States, the tradition of European hegemony when it comes to IMF policy decisions apparently is too strong, for even U.S. Treasury Secretary Jack Lew's exhortations to "all" parties finally to play "Let's make a deal" fell on deaf ears in Legarde's office. The IMF was determined to blow off a Greek settlement offer that was only a billion off the IMF's own target (or less than 1 percent of Greece's total debt), and also rejected a GDP target of .74 percent in 2016 that was only one quarter of 1 percent off the IMF's GDP target.

Based on such apparently minor discrepancies, at least as compared with a 240 billion debt to eurozone countries, a worldwide financial markets crisis has apparently been triggered, at least according to the Monday market openings around the world. (Thanks for nothing, Christine! Next time, be more careful playing bluff poker with a guy who obviously has nothing to lose!)

It remains to be seen whether this relatively minor difference in the greater scheme of things was the reason for Greek Prime Minister Alexis Tsipras to play his referendum wild card--one that should have been but somehow wasn't anticipated by anyone on the EU negotiating team from the start, given that another bunch of Greeks had played the same card back in 2011 in the context of an earlier proposed bailout deal with strings attached regarding Greek austerity measures.

Now the EU folks are having their bluff called, in terms of their insistence that a "No" vote on the bailout referendum (however poorly phrased) would mean the Greeks would be viewed as having rejected their continuing membership in the eurozone. If that is indeed the case, then why all the meetings about what the EU should do now? Logically, there should be nothing for them to do since the Greeks crossed Merkel's implicit "red line" (has she learned nothing from Obama?) Certainly there's nothing to negotiate, is there, with a party who has left the euro?

One German official--Merkel's deputy--said right after the vote results that any negotiations were hard to even "imagine," but that sounds like German for "just a wee bit of wiggle room" about that red line, doesn't it? Not quite the quick draw of the red card for an egregious foul right in the face of goalkeeper Chancellor Merkel.

But now Merkel has communed with her junior partner Monsieur Hollande in Paris at dinner on Monday night to assess what the Eurogroup's response should be to whatever the Greeks do on Monday--it's their move, the Germans say. But haven't they, in Merkel's own words, already made their move--out? What is there to assess (unless she means "re-assess"?) And then there is a EU leadership emergency summit called by Merkel's colleague President Tusk of Poland just on Tuesday. Again, what is there to discuss if Greece is already out the door? Of course, there is that inconvenient little reality that your own Eurogroup rules provide that the euro is really the Hotel California of currencies--you can check out, but you can never leave!

So let me get this straight: the Greeks' overwhelming rejection of the Troika's bailout terms (61 percent to 39 percent, a landslide in any election math) means that the Greeks have pulled off the impossible: they have effectively abandoned the euro currency, even though by its own terms they can't.

Here is how the classic business partnership solves that conundrum: if one partner decides to call it a day, the entire partnership is dissolved ipso facto. There is no remaining partnership, so its rules about membership are now irrelevant--no yellow card or red card for the bad guy, just ... nothing. The remaining partners have to decide anew whether to re-form the group without the quitter. Merkel, for quite obvious reasons, doesn't want to go there--not with Spain, and Portugal, and Italy, etc. So that elegant solution is not available to her.

The first hint of how effectively Tsipras has called what will henceforth be known as Merkel's Bluff (not quite "Angela's Ashes" --not yet anyway: sorry, Frank McCourt) will be whether the European Central Bank early this week continues to offer life-supporting euro-credits to the Greek Central Bank to prop up the country's remaining banking institutions, which are running out of euros to stuff into ATMs and to pay pensioners.

If the ECB says "no mas" euros, then Greece really is out of the currency group, de facto if not de jure, simply and precisely because it just doesn't have enough euros to function economically, and its Central Bank will have to issue scrip IOUs in the interim until it receives local authorization to print and distribute drachmas, which will not be paired on anything close to a 1:11 basis with any euro-based obligations. Greek citizens, of course, will thus get the mother of all "haircuts" on their own euro "holdings," to the extent they remain in their mattresses--largely as stuffing.

But the next big haircut will come to Germany and the other eurozone countries that have guaranteed the ECB's 89-billion-euro advances to the Greek banks, not to mention their holdings (and the IMF's) of a total of 240 billion euros in Greek debt obligations. The euro leaders apparently want to save face by insisting Greece has to make the first move--and it has with the resignation of the finance minister who helped deliver the "No" vote but who offended the EU negotiators by calling them terrorists. So Merkel's bluff has been called yet again with this conciliatory move by the Greek government.

What it comes down to at the end of the day (probably later this week) is this: is over 300 billion euros the price Merkel and the other eurozone countries are willing to pay to back up their bluff and refuse to sit down with Tsipras, or will they all start whistling a little Kenny Rogers, something like "Know when to hold'em, know when to fold'em?"