The Eurogroup is meeting one more time on Monday to decide about the second rescue package for Greece. Division among its members regarding the package exacerbates the markets’ uncertainty. In the last few days, the “strong” countries (Germany, Finland, Austria, Luxemburg, and The Netherlands) have been making remarks as to whether such a rescue would worth the effort. However, even within Germany’s government there have been disagreements, with the Minister of Finance taking a much harder position than Chancellor Merkel.

There are serious doubts as to whether the new rescue package will do the job. Let’s review some facts:

  • The amount that will be dedicated for the recapitalization of the banks is not sufficient, maintaining thus the fear of insolvency in the Greek banking system.
  • The assumptions made in the drafting of the package are optimistic in terms of implementation and tax collection (like the first rescue package), while operational details are still missing.
  • The new math implemented (where through subtraction the troika expects growth) does not take into account the deteriorating economy, the rising unemployment, and the contractionary forces that threaten social unrest.
  • All along they have been pushing for a debt-to-GDP ratio of 120%. Who said that such a ratio is sustainable? It seems that is political expediency in order to justify Italy’s unsustainable 120% of GDP debt.
  • Already troika’s (ECB, EU, and IMF) report talks about a debt-to-GDP ratio of 129% in 2020! And that 129% is with the optimistic assumptions, as mentioned above.
  • If ECB participates in the haircut, its balance sheet will be affected and most probably will need a new swap line from the Fed, especially if other banks in the EU are impacted to a larger extent than what is currently expected.
  • The escrow account where the rescue funds will be deposited cannot be used for the operations of the Greek government, while the government itself has to make deposits into the escrow prior to the funds being used for the repayment of bonds and their coupons. Given the deep recession of the Greek economy and the deteriorating forces, funding gaps will appear everywhere from paying salaries and pensions to basic functions of civil service. Omitting those funding gaps from the scenario that the troika has drafted and with a simple simulation, taking into account all the previous points, the debt-to-GDP ratio cannot be lower than 134% in 2020, and we are not even talking about the unfunded liabilities of the various pension organizations!

The troika now talks about lowering the interest rate on the first rescue package of €110 billion they gave to Greece in 2010. It seems that they still try to violate the economic law of gravity (that you cannot pay interest rate significantly higher than the growth rate of the economy).

We will let the readers decide if this situation is sustainable and also question why doesn’t the Greek government make a simple accounting entry into its budget by registering as receivables the money that Germany owes to Greece through the loans that the Nazi government took by force from Greece, as well as the gold that the Nazis confiscated from Greece along with all the accrued interest? Simple math shows that the amount (even if amortized over five years) generates substantial primary budget surpluses for Greece for the years to come. What are we missing?

Speaking also of German affairs, we are just wondering what is happening with the Taunus corporation which is a wholly owned subsidiary of Deutsche Bank (DB) in the United States. Reports from the Fed show that with a mere equity capital of $4.9 billion it controls assets of over $380 billion! It seems that Lehman Brothers should be jealous about such leverage. Is DB ready to pay up and rescue Taunus if need be, or will it expect the Fed to rescue DB one more time like it did in 2008?

We may be wrong, but it seems to us that the Greek debt even after the second rescue package of €130 billion is unsustainable, the situation with Taunus is equally unsustainable, and that the Euro resembles more and more the Titanic. The question is: Will the maestro order the orchestra to play Mozart’s “Requiem” or Bob Dylan’s “A Series of Dreams” (where the exit cannot be seen with the eye)?