Slog leaks verified as allies turn on Merkel, France opposes bigger haircuts, SPD vows to back EFSF at 440 billion

75% of US investors expect EU to implode

EU splits into diametrically opposed camps

Several senior CDU Merkel allies, including Wolfgang Bosbach, a former champion of European integration, are expected to vote against the EFSF expansion proposal in the Bundestag later today. And lenders to ClubMed are rock-solid in their unwillingness to take debt write-offs above 21%. Both these eventualities were predicted in the Slog’s post yesterday, which used leaks from an anonymous German banking source. The source’s confidence in the passage of the EFSF legislation also seems to be justified.

“The first medicine didn’t work, and now we are simply doubling the dose,” Wolfgang Bosbach told the Wall Street Journal last night, in relation to the Greek debt crisis. “My fear is that when the big bang happens, it won’t just be us who will have to pay – but generations hereafter.”

There is thus now an axis covering the German Central Bank, about 25% of the ECB Board, German voters and CDU doubters completely unwilling to go beyond the 440 billion euro limit to the EFSF….which has to hold back the debt Tsunami from ClubMed until the permanent mechanism comes on stream in 2013.


This limitation alone almost certainly condemns the eurozone as we know it to death. But the final death sentence has been delivered – again as predicted frequently on this site – by the sovereign lending sector this morning in the FT, where it has reacted angrily to suggestions that some eurozone countries want bondholders to suffer bigger losses than those agreed in the second bail-out of Athens. Germany and the Netherlands are allegedly pushing for private creditors to write down more than the current 21% agreed in July’s €109bn Greek rescue: this is obviously Merkel pushing at the locked bank vaults again: she has done so from the start of this process – with some justification – but in the end, the insistence has painted her into a political corner.

The Slog’s Bankfurt mole was also on the button about Angela Merkel being debriefed on new Athenian backsliding. Acting on this knowledge, she yesterday warned Greece that its second bail-out might have to be reconsidered if deficit reduction targets were missed. For public consumption, the German Chancellor said “We must now wait to see what the troika finds out” (the Troika-Greece negotiations start again formally today) but the reality is that informally gathered information suggests only a deterioration in the lag between the schedule and the progress achieved so far.

As for the views of our Bundesmole on events in Paris – only partially supported by sources there yesterday – it now also looks increasingly certain that things are as desperate as alleged: the FT this morning asserts that the Germanic haircut demand ‘has split the eurozone with France and the European Central Bank leading the opposition’. There are two obvious reasons for this: Jean-Claude Trichet’s deep reluctance to have any more haircuts (again, see the Slog piece of yesterday); and President Sarkozy’s rising state of terror in relation to the French State’s obligation to meet major banking losses directly. New York sources told me last night that a big downgrade of France’s credit rating is now “almost a dead cert”.


The next move in this farce of denial isn’t easy to predict. On BBC television last night, deflator of EU pomp Peter Oborne did what we would all like to do: he kept on calling the eurocrat invited to debate with him an idiot until the bloke quit the studio. But in the end, venting the spleen – while entirely healthy and serving an important purpose for British morale – does little more than illustrate how a regiment of ridiculous chocolate soldiers have delivered us unto the pit, in which a horribly sharp pendulum is swinging ever more quickly.

A simple (and in my view, now irrefutable) threefold extrapolation is there for any realist to see. First, both the ClubMeds in general and the eurozone in general have been doomed by the intransigence of Germany and the sovereign lenders. Strong, early leadership and bold creativity (in the style of a 1933 FDR) could’ve avoided this outcome, but any chance of that is long gone: the EFSF and a 21% haircut are woefully inadequate defences against south European defaults. And second, Greek torpor (and party justified resistance) alongside crazy French debt exposure make a eurozone banking system collapse difficult to avoid: indeed, Bloomberg research this morning suggests that 75% of professional investors believe it to be inevitable.

Last but not least, the civil service apparatchiks of both France and Germany seem to me to have ditched the European Dream in favour of tackling the empirical nightmare. Not only that, but they too now find themselves with entirely opposing strategies towards achieving the objective of survival. If they fall out, then the whole ghastly Brussels-centred edifice will collapse.

The EU is, literally falling apart as we all watch, like ghoulish witnesses to a pile-up.

My guess is that one or both of these events will occur over the next week or ten days: a French bank failure, or a Greek default. Given Merkel’s probable willingness to give Athens the final 8 bn euros in the end (and put off the default while more of her bad-bank hatches are battened down) I’d suggest the former is far more likely. And of course, in real terms, infinitely more deadly.

The US Fed Reserve then becomes the bailout of last resort. And this is a role it can longer support.

Stay tuned. And if all this is too much for you, there’s always The Slog’s new page, The Big Top, to help you laugh about it.