Germany’s Roadmap For A Greek Return To The Drachma

There has been much speculation about how the Greek endgame will play out, but precious little from the perspective of Germany. Until today. Courtesy of a three part series from Handeslblatt (here, here and here) we now know precisely what the next steps are as visualized by Europe’s piggybank, which now is telegraphing it is set to cut Europe’s most wayward child loose.

Step-by-step summary:

1. Greece cannot stand by the spending cuts expected by the Troika. €11,5 Bn until June
2. The creditors refuse the payment of the next tranche. Greece must pay €30 Bn until the end of June, to pay pensions, civil servants salaries, and support its ailing banking sector.
3. Greece cannot service its debt anymore. Which means essentially service its debt to debtors like banks, bringing its banking sector to a likely bankruptcy (remember Greek banks were already hardly met by the 80 Bn € PSI in March, 2 big Greek banks already have negative equity).
4. Greece must save its banks to avoid a bank run. There will be no other way than reintroducing the Drachma since no one will lend them money, IMF or EU.
5. Greece gets out of the Euro and reintroduces Drachma. “It wouldn’t be that easy since to avoid panic and a bank run, a banking holiday (perhaps a week) would be necessary.Even with capital controls with foreign contries, the process would remain technically difficult. For the Greeks this would mean serious consequences as loans would see the value drop and prices would go up. On the short term, the competitiveness of the country would improve. According to economists, a 50 % depreciation would be necessary. That would, at least theoretically, mean that holidays in Greece would be substantially cheaper. It can still be doubted that Greece would solve its problems its way. Who wants to spend there its holidays , where unrest and chaos reign. “Greece could earn air to breath on the short term. This would change nothing to its problems on the longer term”, Commerzbank economist Christoph Weil says.”

Much more in the full Handelsblatt series.

The only question is now that the return of the Drachma appears set, how long before the “Greek case” metastatizes to Spain, which is already roughly where Greece was about a year ago, with the bank sector now effectively having seized up, and the only question is how soon until the sovereign debt has to get the “PSI” treatment.