The Germans and the Greeks may be at serious odds over the future of the European Monetary Union but at least they do not misunderstand each other’s positions.
That is progress.
Germany rejected the Greek request for an extension of its European aid program today, noting the proposal doesn't meet the conditions set out in the bailout agreement.
The rescue package requires that Greece periodically demonstrate to its lenders that it is has satisfied the terms of the bailout before the disbursement of additional funds. The inspectors from the ECB, the IMF and the EU Commission left Athens weeks ago unable to certify compliance.
“The letter doesn’t meet the criteria agreed upon in the euro group on Monday,” said German Finance Ministry Spokesman Martin Jaeger. “In truth, it aims at bridge financing without meeting the requirements of the program.”
For Greece that is exactly the point. The newly elected Syriza government of Prime Minister Alexis Tsipras and Finance Minister Yannis Varoufakis was elected to end the austerity that they say has crippled Greek society. They intend to raise wages, restore government jobs and halt the privatization of government service, all forbidden under the terms of the bailouts.
Greece rejects an extension of the current bailout agreement precisely because of the attached austerity conditions and is seeking what it calls a 'loan extension'.
The argument is more than semantics. Prime Minister Tsipras has said he intends to keep his campaign promise to finish with austerity. Germany is demanding that Greece again promise to adhere to the original conditions.
With Greece shut out of the credit markets and its banks wholly dependent on the ECB for liquidity as deposits continue to flee, Prime Minister Tsipras has limited choices if Germany refuses to condone a change in the austerity program.
Markets continue to view the Greek-EU contretemps with complacency. The euro is trading at 1.1388 as of noon in New York, about midway in its range for the past two weeks. The Greek 10 year bond was yielding 9.93 percent, down from 10.28 percent two days ago and the January 30th high of 11.17 and miles from the 37.01 percent top in March 2012. Greek stocks advanced for a second day with the Athens Stock Exchange benchmark up 1.1 percent and 20 percent since the January 28th 2 1/2 year low at 711.13.
Greece, apparently ignoring German objections, has addressed the entire Eurogroup, meeting tomorrow on her extension request.
"The Greek government submitted a letter to the Eurogroup asking for a six-month extension of the loan agreement. Tomorrow's Eurogroup has only two options: either to accept or reject the Greek request," a government official said. "It will then be clear who wants to find a solution and who doesn't,' according to Reuters.
However, even if Germany prevails her victory is likely to be hollow.
Greece, under the gun of default, may say it will follow the program, but will it? If it does not, then in six month or a year Germany and Greece will be back at the very same table, arguing over the same issues. This saga has a long way to run.
Chief Market Strategist
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