The following is an excerpt from a recent issue of Private Wealth Advisory. In it I reveal that Germany has in fact already implemented a working group to assess the cost of Greece leaving the EU. Moreover, numerous multinationals are now preparing for this outcome as well.
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The US Presidential election is over and the world has woken up from the political rhetoric and propaganda to realize that the problems it faced before November 6 are still in place. Indeed, one could very well make the case that the US Presidential Election distracted most people from the fact that things were in fact getting markedly worse in the financial system.
Let’s start with Europe.
Greece has managed to get through its latest budgetary crisis (a €5 billion bond redemption due the Friday before last) by the skin of its teeth. In this case, the ECB permitted Greece to redeem asset-backed-securities (read: total and complete garbage) in exchange for funds.
This deal occurred commensurate with the usual promised budgetary cuts on the part of Greek politicians (none of which will be met as usual) along with the Greek populace rioting in Athens. This has been and will remain the deal in Greece right up until someone cuts off funding. At that point Greece will leave the EU, default or both.
Timing this will be quite difficult, but Germany has already given us clues that it is preparing for a Greek exit.
Debt crisis: German finance ministry examines cost of Greek exit
A special working group, led by deputy finance minister Thomas Steffen, is working on scenarios in the case that Greece is forced to withdraw from the 17-nation bloc, the Financial Times Deutschland reported on Friday.
“Colleagues are making calculations about the financial consequences [of an exit] and are considering how a domino effect on other euro member states might be prevented,” it quoted a finance industry source as saying.
The ten-member working group, which is made up of officials from various finance ministry departments, wanted to be fully prepared for a possible “negative scenario,” the source added.
Last week, German finance minister Wolfgang Schaeuble said it would be “stupid” not to make contingency plans in case Europe’s rescue efforts failed, adding that the debt crisis must not become a “bottomless pit” for Germany.
This news story received almost no coverage from the mainstream media, despite its import.
Firstly, this is the first time Germany has officially moved to prepare for a Grexit. Germany has certainly threatened to kick Greece out, but it has never actually taken formal, official steps to prepare for this.
Since August 24 2012, it has.
There is good reason for this and we get clues from German Finance Minister Schauble’s “bottomless pit” comments in the above article.
Schauble made this comment once before back in February 2012 before the second Greek bailout:
Schaeuble pointed out that German opinion polls show a majority of Germans are willing to help Greece.
“But it’s important to say that it cannot be a bottomless pit. That’s why the Greeks have to finally close that pit. And then we can put something in there. At least people are now starting to realize it won’t work with a bottomless pit.”
Schaeuble said Greece would be supported “one way or another” but warned the country needed to do its homework on improving its competitiveness and hinted it might have to leave the euro zone to do that.
Note that in reference to Greece being a bottomless pit, Schauble was already hinting that Greece may leave the EU even before the second Greek bailout occurred.
The fact that Schauble has now formed a working group to measure the impact of a Grexit while again referring to Greece as a “bottomless pit,” shows clearly that he is about done with propping up Greece… and for good reason.
Currently Germany is on the hook for €751 billion in EU backstops. The German economy is only €2.5 trillion. Put another way, Germany is on the hook for an amount equal to of its GDP.
Anyone who believes Germany will actually pony up this cash is dreaming. The single largest transfer payment in history was the German Marshall Plan, which was $13 billion at a time when US GDP was just $200 billion.
This constituted a transfer of slightly over 6% of US GDP.
That is the single largest transfer in history… and Germany is going to bailout Europe by an amount equal to over FIVE TIMES this?
This is simply not going to happen. Germany will play ball with the EU by signaling its efforts to keep things together, but the German’s have in fact been implementing a contingency plan for nearly one year now.
I broke this story in February 2012. I haven’t seen it mentioned anywhere else. I wrote:
…Germany has put into place a contingency plan that would permit it to leave the Euro if it had to.
As a brief recap, this contingency plan consists of:
1) Legislation that would permit Germany to leave the Euro but remain a part of the EU.
2) The revival of its Special Financial Market Stabilization Funds, or SoFFin for short, to which Germany has allocated 480€ billion Euros to in the case of a banking crisis (the fund will also permit German banks to dump their euro-zone government bonds if needed).
This occurred back in February. And Germany now has a formal working group assessing the cost of a Grexit? The EU is on borrowed time. I mentioned earlier this year that German tourism companies have put contingency plans for the return to the Drachma in the contracts for their Greek subsidiaries. However, now even large US-based multinationals are implementing contingency plans for a Grexit.
The list includes JP Morgan, Bank of America Merrill Lynch, Visa, PricewaterhoursCoopers, Boston Consulting Group, Juniper Networks, and others.
Buckle up, things are about to get ugly.
This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.
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