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Guest Post: The Swiss Franc sends message to Merkel and Tsipras

Swiss chocolates bought in Swiss Francs? Oh, no! Or “much better,” after all? How does the lifting of euro cap by Swiss National Bank affect the Greek debt? I asked this question to economist “Cheshire Cat” and here is his analysis!

Doors open wider for Merkel and Tripras to do realpolitik with Swiss Chocs…

There was already a logic to do so, but if that wasn’t not enough, today’s surge in the Swiss franc should act as a reminder how precarious the EuroZone is.

One essential question: is the Greek Debt sustainable?

The bailout measures to lower the Greek debt burden have done exactly the opposite, The debt-to-GDP ratio has increased as output or GDP has fallen by 25%  – the ‘multiplier’ miscalculation admitted by the IMF as a policy error. This austerity miscalculation has created a disastrous environment for investment and this has not been corrected.  A safe Swiss bank account is more attractive thing to invest in than machines, skills, new products when larger sections of society are trapped by debt and can’t even pay basic bills.

So, if the answer is no, why should German taxpayers pour more money into this black hole – sucking in funds better that could be used to help Europe’s struggle with growth. The Greece state is anyway bankrupt. It is not borrowing from private investors as the so-called bailout successfully passed the debts and all the risks on to the taxpayers..

Syriza does not want to leave the Euro and Germany needs to minimize the costs to its taxpayer. The costs of persisting with a failed bailout program or forcing a GREXIT is high for German taxpayer –  as noted in Deutsche Welle  (07.01.2015)

In total, the Greek state, Greek corporations and Greek citizens owe about 23 billion euros to German banks. Most of that is owed to KfW, Germany’s state-owned development bank.

Public money at risk

“The exposure of German private capital to Greece has been declining,” says Fritz-Vannahme. German banks are therefore unlikely to panic at the prospect of Grexit.”

“The German taxpayer’s losses, however, are likely to be significantly higher than they would have been 2012,” he said. “The German government’s guarantees have increased significantly. So for the taxpayer, Grexit might be very, very expensive.”

The German government has extended loan guarantees to Greece currently worth around 50 billion euros.

“This money is in the line of fire, but we are not going to get it back in the short term – at best perhaps in the long term,” Thomas Straubhaar, Professor of International Economics at the University of Hamburg told German radio.

Greece will be unable to repay its debts, regardless of whether or not the country stays in the eurozone or not, Straubhaar said.

“The costs for Germany are equally huge either way,” he said.

To minimize the cost to Merkel’s taxpayers, the debt has to made sustainable.  With about 85% of Greece’s €317bn debt owed to the ‘official’ sector (including €54 bn to the ECB) and as borrowing cost have begun to fall, there is reason and more space to negotiate  – such as  longer maturity rates.
The surge in the Swiss franc, a safe haven, sends many warnings. The ECB had planned to introduce Quantitative Easing (QE), which would have lowered the Euro against the Swiss franc anyway. Today’s surprise announcement by the Swiss National Bank and the sudden rush for the Swiss francs, shows where this liquidity might end up – particularly if the wrong decisions on debt are made. Germans are already uncomfortable about QE. These are dangerous times. One wrong move by Central Bank and a 1930s ‘beggar-thy-neighbor” currency war breaks out to accompany the 1930s austerity that we already have.
In one sense Syriza position has strengthened. There are mutual benefits and it called realpolitiks not blackmail.”””
I had to revise the original title after author’s request.
PS thank a lot, Cheshire Cat, much appreciated 🙂

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