Germany rules out debt cut while Greece remains in the Eurozone

Zero Hedge

Zero Hedge — With the IMF and Germany again at each other’s throats over the never-ending drama that is Greece, German Finance Minister Wolfgang Schaeuble made clear once again that he wants to see greece out of the euro.

In response to the IMF’s demands for a reduction in Greek debt and fiscal surplus, the German ruled out a debt cut for Athens “as a violation of European rules“, adding that “the country would have to leave the euro area to do so [get debt relief].

“We can’t undertake a debt haircut for a member of the European single currency, it’s ruled out by the Lisbon Treaty,” Schaeuble told German broadcaster ARD. “For that, Greece would have to exit the currency area.”

The German minister added that Greece will be able to complete the current bailout program if the country meets the (unrealistic) conditions set by creditors, who must keep up the pressure on the government in Athens.

Greece’s main problem isn’t debt, but rather competitiveness, he said, which of course would mean that the Greek currency would need to devalue. An internal devaluation is the aim of the creditors, through a policy of prolonged austerity aim to have the same effect on the county’s economy as an exit from the eurozone, but without any of the benefits of a haircut or the economic stability that will follow  the removal of the recurring threat of Grexit lingering over the economy, through the return to a national currency.

“The pressure on Greece to undertake reforms must be maintained so that it becomes competitive, otherwise they can’t remain in the currency area,” Schaeuble told the German people. And since external competitiveness, i.e. devaluation, is impossible, Greece will have to achieve it by other means, namely even lower wages.

Greece may well be forced comply with Schauble’s demand to “exit the currency” the WSJ reported earlier in the week, after the IMF meeting on  Greece.  “Once again, Greece  risks a eurozone exit amid stalled bailout talks, sending the clearest signal yet the emergency lender isn’t likely to soon rejoin Europe’s failed efforts to fix the debt-weary nation.”

Fund officials said Athens and its European creditors must agree to much deeper economic overhauls and substantial debt relief before the fund considers contributing another cent.

“Upfront commitments of debt relief which delivers debt sustainability based on a realistic target for the medium-term primary fiscal surplus are a prerequisite for program success in the circumstances faced by Greece,” IMF economists said in the second report. “The program’s chances of success could have been greater if the degree of ambition in its targets and the optimism in the macro framework had been tempered,” they said.

But at least Greece still has the euro, although if Schauble is to be believed, not for much longer as the combination of a joint currency and an “explosive” debt load (per the IMF) simply can not continue to coexist.

In short: it is shaping up as yet another “summer of Grexit”, especially with just over €6 billion in Greek debt maturities set to hit in July.