As Auditors Arrive in Greece Germany Faces a Downgrade

Today auditors from the European Central Bank, the International Monetary Fund, and the European Commission arrive in Greece to assess whether the Greek government is keeping to the conditions necessary for continued assistance. If sufficient progress has not been made Greece will not receive the last payment of the bailout, worth $38 billion. The Greek Prime Minister, Antonis Samaras, said today that Greece can expect a deeper recession than previously predicted. According to Samaras Greece, like Spain, will not see growth until 2014.  

The situation in Spain continues to rattle investors, with the bond markets looking like they have lost confidence in the country completely, indicating that investors think a sovereign bailout increasingly likely.

The news for the typically economically sounder countries in Europe is also far from reassuring. Moody’s has put Germany, the Netherlands, and Luxembourg on negative watch. France and Austria both lost their AAA rating earlier this year, and it looks like Germany will follow suit unless a Greek euro exit can be contained and support for countries such as Spain and Italy can be organized.

It looks increasingly likely that September will be the month in which the lifespan of the euro will be more easily estimated. A European Commission spokesman has said that it is unlikely that the troika (ECB, IMF, and European Commission) will be able to report on their audit until September. That month, on the twelfth, the German Constitutional Court will rule on the constitutionality of the European Stability Mechanism. While it is likely that the court will rule in favor of the agreement the conditions attached will almost certainly make the conditions of future bailouts of Spain and Italy much harsher than bailout conditions for Greece.

If the German Constitutional Court rules in favor of harsh conditions for future bailouts and Germany and other stronger European countries lose their ratings it is hard to see how Greece remains in the eurozone past the end of the year. 

The likely situation is that Germany suffers a loss in growth while trying to support Italy and Spain through some sort of sovereign bailout after Greece leaves the eurozone. Were this to happen we would almost certainly see closer fiscal union and the issuing of Eurobonds.

As usual in Europe the political reality of the situation could change quickly. Germans may express their dissatisfaction with bailing out irresponsible countries through political action and dissatisfaction with ‘austerity’ in the Mediterranean could see left-wing parties like the Greek Syriza enjoying more support. Such a situation would make future bailouts impossible to negotiate and would cause the euro to collapse sooner than expected. 

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  • Scruffy Nerfherder||

    As Glenn Frey once said, the heat is on.

  • Whiterun Guard||

    I totally thought you were going to go with "Peaceful, Easy Feeling".

  • AuH2O||

    My suggestion is to use the fact that Europeans refuse to do anything in August to stock up on food, water, medicine, ammo, etc.

  • Spoonman.||

    I bet Obama would really prefer them to wait to release their findings until November.

  • Invisible Finger||

    The EU will do the right thing after all other possibilities are exhausted.

  • Jerry on the road||

    Greece is of course in the enviable position knowing that EU politicians will want to keep the project going at all cost. So the member states are likely to give Greece money even though the IMF won't be involved anymore. Of course they need massive spin in order to sell such programme to their own constituents. Something like "we need to counteract the brute market forces that are hampering Greece's recovery."

  • ||

    "we need to counteract the brute market forces that are hampering Greece's recovery."

    Oh, those awful "market forces". Surely they couldn't be telling us something. Just march onward into the bright social-democratic future. I'm sure those market forces will go away with enough willpower and determination. And executions of speculators.

  • Auric Demonocles||

    I'm downgrading you because you don't seem to have very much alt-text to spend.

  • WimFooo||

    Sounds like some pretty crazy stuff dude. WOw.

    www.Pro-Anon.tk

  • DRM||

    Germany should withdraw from the Euro. The Euro will devalue in response, which is what the PIGS need, while nobody will technically default and the German people will have their savings in nice solid Deutschmarks.

  • ||

    Agree in part. I'm debating whether it would be better to have all of Europe collapse and have to rebuild sans welfare state. Or let the worst collapse on their won, and save the more "anglo-saxon" economies.

    Also, where is France on the list? After PIGS, France is surely one of the next in line.

  • ||

    I wonder when Europeans will wake up realize that the bailouts just enable a corrupt welfare state to enjoy a few more months of handing out free goodies.

    Germans are being sold a line of horseshit that they will somehow save their own economy by preventing Greece and Spain's from collapsing. Greece and Spain need to collapse in order to really reform themselves. The only way austerity is going to be swallowed is when they have no other choice. Giving them a bailout lets them avoid doing what is really necessary for a short time. The Germans might as well just issue welfare checks directly to every Greek citizen.

    For Grmany, the question should not be whether they should save the PIGS. It should be whether they are going to let the PIGS take them down with them.

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