Greek Debt Exclusive: Default Planners ‘Falling Out Over Firewall’ – Sources

By John Ward

More pieces of timetable jigsaw falling into place

Astonishing details of a Greek default plot hatched by Wall Street and the White House (with the knowledge of both Barack Obama and Hillary Clinton) have been backed up by growing evidence of an undercover US Fed ‘swap’ deal to bankroll Mario Draghi’s eurobank liquidity programme . As a quid pro quo for this disguised loan, the US demanded a ‘leper’ default for Greece – with a much bigger European-funded contagion firewall than currently exists. But the plans may be derailed by intransigence in Berlin.

US President Barack Obama spent last Martin Luther King Day with wife Michelle and daughter Malia. They joined fellow volunteers at Browne Education Center in Washington. During his brief remarks, on arrival, the President said there was no better way to honour King “than to do something on behalf of others”.

MLKD is a public holiday in the US. On that day this year – January 16th – Presidential staff and Fed advisers were in a conveniently empty office block with a dozen or more top Wall Street bankers. The meeting was called to brief a select band on the White House and Geithner approved operation to amputate the eurozone’s obviously gangrenous Greek leg.

Just 24 hours later, a remarkable undercover bailout slush fund was set up for the use of the ECB under Mario Draghi. On that day, the financial website Wealth Wire posted a piece suggesting the Fed was ‘up to something mysterious’ , and Jonathon Trugman of the New York Post’s financial desk wrote this: ‘Essentially, we just bailed out Europe’s banking system with the full faith and credit of the United States’.

Subsequently, a former Fed official told the Wall Street Journal that the Reserve was indeed bailing out Europe by operating in the shadows – aka a loan masquerading as a currency swap.

Former Vice President of the Federal Reserve bank of Dallas, Gerald O’Driscoll told the Journal:

“The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB).  Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

The two central banks [ECB and US] are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.”

Well, swap or loan, it all went into the eurobank prop-up operation initiated by Mario Draghi. During the period following that transfer, the ECB lent $483bn in various amounts to just over 500 banks in the eurozone. Says a eurozone insider:

“Mario then leveraged the amount he’d been given as collateral. Given his position and influence, it wasn’t hard. Without pulling this scam  [to avoid the amount appearing on the ECB’s market intervention charts or in its books] the Central Bank couldn’t have splashed out the liquidity it did.”

I am told that the operation is continuing – and will be used to fund the next round of voracious private eurobank appetite for liquidity.

But what nobody has yet reported in the MSM is that the operation was part of a pre-agreed quid pro quo.

That deal was outlined to the key Wall St players on January 16th. In a nutshell, it was “We bale out the eurobanks for Mario, and in return they [the EU States] build a firewall around Greece”. It was the start of what became known as ‘amputate and cauterise’. And I can confirm that Goldman Sachs played a pivotal role in the session.

The American view is this: Greece must default outside the euro, and become a leper. Secretary Geithner thinks the Europeans don’t have the money to make the banks ultra-safe…and that means an immediate contagion blowback to the US, with disastrous consequences. So we, the US, must covertly help the ECB render the eurobanks safe – and in return, they need to step up to the plate by leveraging whatever firepower they need to ensure the whole mess stops at Greece.

Astonishingly – The Slog has learned – the key players at this point were Timothy Geithner, Goldman Sachs, a tight group of White House Obamites, Ben Bernanke (at “a safe distance”), Mario Draghi, IMF boss Christine Lagarde….and an influential group of German bankers based alongside Draghi in Frankfurt. Both the President and Hillary Clinton are aware of the arrangement and its goals. As far as I can ascertain, it now looks likely that Merkel and Schauble were not involved at all; but whether they’ve become party to it since is unclear. I do know there was a major diplomatic flap on in Berlin last Tuesday (21st February) about the potential leak of papers somehow incriminating the German Chancellor and her Finance Minister…but that has never developed, or been confirmed by any source of which I’m aware.

As a consequence, from this point onwards Christine Lagarde began to play serious hardball about the need for a massive firewall investment by EU member States. Concurrently, Secretary Clinton applied every ounce of available pressure to the Sino-Japanese credit line as a potential further source of bricks in the wall. As we have seen in the last week, unlike the Three Stooges Regler, van Rompuy and Barroso, Clinton’s State Department seems to have had some degree of success. Less so Lagarde: she has come up hard against Berlin’s refusal to expose Germany further. I am told:

“The view in the Fed and Washington is that the Europeans are welching on the deal. This strikes me as kind of dumb, in that I don’t think they ever had Berlin on board in the first place. And while Draghi is a genius, not even he can pull that one round on his own. Just how up to speed Berlin is, I don’t know. I assume they know roughly what the deal was, and I assume that Bankfurt has been applying pressure on the basis of that. I suspect the problem is that Schauble thinks, first off, there’s a lot more in this for the US than there is for Germany…and second, privately he thinks the amputation analogy is unrealistic. He’s more of a pop-corn guy. But some of that is guesswork.”

The pop-corn reference is based on an influential term used by former Bush staffer Edward Lazear. He suggested that Greek debt is really a cooking piece of pop-corn in a pan…once it pops, you can’t stop the other seeds from doing the same. It’s a view shared by The Slog: the leveraging and insurance fire-storm that could potentially follow default is impossible to calculate, because the arrangements of individual banking firms remain a closely-guarded secret.

But on the other hand, it beats the Brussels strategy of writing Japanese poetry and making false promises about action. And in the meantime, the behaviour of some players continues to support the deal’s existence:

* The Greek consitutional change demanded by the Troika (to hierachise debt before other expenditure) will not be possible by the Greek bailout closure date. And they knew that all along.

*European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times. There is no way the Greeks will stand for that either. Says Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy, “The programme is being set up to fail, as many of these conditions will be impossible to achieve”.

*In an interview with the Wall Street Journal, Mario Draghi’s support for the deal remains understated bordering on tepid: he suggested that the sceptical market response to Tuesday’s rescue deal suggested many doubted Athens would follow through on a promised austerity cure. “It’s hard to say if the crisis is over,” he warned.

*Commerzbank AG Chief Executive Martin Blessing yesterday said of the Brussels deal, “The participation in the haircut is as voluntary as a confession during the Spanish Inquisition”. For the Bankfurt pro-default team, this is bang on message.

Nor are these people making it up: the bondholders must give more than 50% approval before the swap – and they need to deliver that on a two-thirds quorum. Hedge Funds in particular remain tight-lipped.

As I keep saying: this deal will not make it to the tape. It was set up to fail: but even that plot may now unravel if the firewall doesn’t materialise at a level satisfactory to the Americans.

This piece was compiled and written based on confidential interviews with New York, Washington, German and Brussels sources

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