John Ward – Troika To Accuse Greeks Of Building Secret Survival Fund – Alarming French Debt Data Shift Eurozone Balance Of Power Back To Berlin – 17 August 2012

As the true extent of Greek ally France’s short-term debt problems came to light, French sources today reported that the Troika will produce “a damning report” on Greek austerity and debt repayment progress….alleging in particular that Athens is building a ‘survival fund’ to give it greater bargaining power. This muddies the waters still further in relation to the European tour of Greek Prime Minister Antonis Samaras next week:  Berlin now looks to be in a stronger position than previously.

Events make fools of us all. Last Saturday, The Slog nailed its colours to the mast of an inevitable German exit from the eurozone. I still think the odds are very much on that outcome, but one or two developments in the last 36 hours have moved things back into the realms of possibility for a Merkeschäuble triumph against those odds. For the risk investor, these are the most significant ones helping Germany:

1. As The Slog posted this morning, the ECB seems to have theoretically deeper pockets – and France much bigger debts – than many had previously assumed. These facts mean, respectively, that Athens is less able to play the damage limitation card, while France is a less valuable ally than Samaras had hoped. (It has been reported today that the Greek PM already has the support of Francois Hollande for his desire to relax the pace of German austerity and debt repayment).

2. Berlin is (as predicted here) gathering media forces in an attempt to steamroller opposition. German newspaper Handelsblatt reminds Mario Draghi that, under the Lisbon Treaty, the ECB lost its independence: Article 13 of the consolidated treaty (p. 23), states that the Central Bank, along with the other institutions, “shall aim to promote its [the Union’s] values, advance its objectives, and serve its interests”. In short, the ECB is subservient to Berlin-am-Brusssels. Der Spiegel meanwhile headlines with ‘Greece Before the Abyss – Only Bankruptcy Can Help Now’, adding pompously, ‘Greece has disappointed its creditors yet again. Now its government plans to ask for more time — and needs billions more in aid. But Greece’s euro-zone partners are unwilling to provide any more help, meaning that the only hope now is to admit defeat and let the country make a fresh start’.

3. Leaks from both the Greek tax authorities and the Troika suggest that the Greek tax intake figures are truly dire. Hardly surprising, but a severe weakening of the Athens position.

4. Sources close to the Troika are meanwhile suggesting that its September report will accuse Greece again of dragging its feet on asset sales, failing to clamp down on massive tax evasion, and deliberately pursuing policies to benefit itself rather than the creditors.

This is the point at which we segue into those factors building in favour of the Samaras bargaining position:

5. As per 4 above, there are signs (and feedback) suggesting that the Athens government is indeed ahead on some of its spend-cutting programmes. Sources there are certain that the Greeks are building a budget bypassing the Troika – thus giving the country an emergency fund to live on if things go badly wrong next week.

6. Samaras is carrying with him a compelling dossier of some social and economic consequences of the austerity programme as it stands. These, he will suggest, are more than enough to save face for both the Troika in general and Merkel herself were they to accept a slowing of austerity and lengthening of payback period.

7. As The Slog has been insisting for weeks now, the pressing geopolitical needs of the US and Israel offer a clear alternative future for Athens to the EU….one which would be avowedly anti-Turk. Perhaps even more persuasive is the by now very clear evidence that Greece is sitting on massive undersea energy reserves: these could be crucial for a eurozone desperate to reduce its dependence on Russia as a source…and a major boost to the commercial interests of Israel and the US.

My own view remains that the pendulum will swing back again, but much now depends on the timescale of that taking place. To explain, I believe that the situations in Spain and Italy will be telling if they each a crisis point during next week – something I see (along with many credit sector contacts) as a probability. The potential cost of a Greek departure, when added to the de facto bailout of Spain, will bring a furore of alarm from Bankfurt, fear from the German electorate, anger from Paris, panic in the markets….and horror to Mario Draghi.

Put together, that combo will, I believe, force Merkel to uncock her gun. And having done so, Berlin will have no choice but to switch to Plan B – departure from the eurozone. I think it likely that the markets will be the decisive factor as usual: but what of Draghi’s ECB itself – which, according to our indiscreet official of yesterday, could in theory absorb far more debt than most people realise?

Stay tuned. This one is finely balanced.

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