Germany Stands Ground, Greece Rejects Bailout Terms

by Nathan McDonald, Sprott Money

The Monday deadline for a Greece bailout deal has come and passed. The newly elected Greek government was quite clear going into the talks, that they wanted a restructuring, a lessening of austerity, and boldly enough, more funding.

In the short term, the European Union looked as if they were going to cave to the demands of Greece and likely would have, if not for one country…Germany.

Germany remains the most important country in the EU. It is the true engine behind its growth and what truly holds these fragile agreements between countries that have little to nothing in-common with each other, in one piece.

The people of Germany are fed up. No longer do they want to continue bailing out countries that can’t support themselves, and for this sentiment they cannot be blamed. Unfortunately for the current Chancellor of Germany, Angela Merkel, this puts her between a rock and a hard place.

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On one side, it is quite clear that Merkel would like nothing more than to continue with the fantasy that the EU is sound and secure, that it is not horribly flawed and attempting to keep a group of countries together under a single currency, that arguably shouldn’t be together in the first place.

Then, on the other hand, she needs to cater to her voting class, and keep her party in office. If there is one thing these people don’t like losing, its power.

Therefore, logically, Merkel has taken the hard stance against the demands of Greece and its newly elected officials. This has caused another shockwave across global markets, as once again a Greek debt default is on the table.

The new deadline is March 1st, in which both sides will have to come to an agreement. If not, Greece will officially go bankrupt and have no other choice, than to default on its current obligations, obligations that the current Greek government holds with deep disdain.

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The risks are high for both parties, far more so for the current power structure and the banking system in the European union. There are roughly 26 trillion derivatives that are directly tied to the value of the Euro.

The Euro, like all other global currencies in circulation is fiat. It is backed by nothing, except the faith of its users that it is “worth” something. The quickest way to shatter faith in finance is uncertainty, the ultimate enemy of all markets.

Currently, both Greece and Germany are nowhere close to an agreement. This has Western Central bankers on edge, as not only does this divide need to be bridged and bridged quickly, but a change to the bailout terms in any sense would need to be approved by the March 1st deadline. The issue is, all members need to get their parliaments to approve these terms. A monumental feat, in and of itself.

Granted, this is not impossible and in all likelihood Angela Merkel will be pressured into submitting to the Greek demands. The risks to the European banking system are simply too high. The contagion that would spread around the globe, would cause volatility that would rival that of the 2008 economic crisis.

For the Greek people, the risks are certain, but perhaps required. A default would free them of the bondage placed on them via the 2010 bailout agreement with the IMF and EU. Additionally, Russia has already made it quite clear, that they would be more than happy to assist Greece in its time of need.

Is a return to the Drachma rapidly approaching? We’ll find out come March 1st, until then, the currency wars continue.

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