“Very little of the bail-out money so far has gone to the Greeks. It has all gone to the bankers,” one analyst tells CNBC.
As the world waits to see if Greece will reject the austerity imposed upon it by the European Union and International Monetary Fund, and even leave the euro, one analyst is warning investors that Germany will not stand by and allow a Greek exit from the euro zone—a so-called “Grexit”—as more and more market-watchers now seem to expect.
“It’s not hard to understand why. The Greeks won’t accept austerity anymore. The Germans won’t give them any more money if they don’t take the harsh medicine that is being prescribed. Game over. The exit signs are flashing red,” Matthew Lynn, the founder of Strategy Economics in London told CNBC.com on Wednesday.
“There’s just one snag with that analysis. It isn’t going to happen. Germany will realize the risks involved, eat its words and come up with a mega bail-out. Instead of a ‘Grexit,’ we’ll see a ‘Grashall Plan’—as a Marshall Plan for Greece will quickly be dubbed—to re-flate its economy and keep the euro staggering on for a couple more years at least,” said Lynn.
A growing number of market-watchers believe that a Greek exit from the single-currency zone is now a very real prospect, and that Greece risks losing funds from the EU and IMF bailout unless it sticks to the terms imposed upon it.
“The cash to pay bondholders isn’t going to be there. The police and soldiers and public servants are not going to get their wages. Without the next slug of bail-out money, Greece is going to quite literally shut down,” said Lynn, who expects Greek voters to reject austerity for a second time in elections next month.
The message from Berlin is fairly clear, with senior officials saying that everything is under control. But the German government will not allow Greece to leave the euro, according to Lynn.
“A ‘Grexit’ is far from certain. The Germans are talking tough. When it comes to the crunch, however, they will blink, and deliver a Marshall Aid-style package to keep Greece in the euro.”
“There is absolutely no way of knowing whether contagion to other countries can be contained,” he added.
“You can line up a few emergency summits to solemnly declare that even though the Greeks might be out, there is no way the Portuguese or the Irish are going to follow them—and certainly not the Italians or the Spanish,” he said.
“The trouble is, you can’t really know how it will play out. No one has tried breaking up a single currency before. Money may start to flee out of every country at risk of coming out of the euro,” Lynn warned.
With Europe on the brink yet again, Lynn predicted Germany will act.
“The Greeks can’t carry on with the austerity being imposed on them. No country can be expected to endure annualized falls in GDP of 7 percent or more,” he said, “and 50 percent youth unemployment for years on end”.
“On Tuesday we learned that the Greek economy shrank by another 6.2 percent in the latest quarter. It simply isn’t acceptable” Lynn said.
“But Germany and the rest of the EU could come up with a Marshall Aid-style package for Greece. Very little of the bail-out money so far has gone to the Greeks. It has all gone to the bankers.”
“Forget talk of a ‘Grexit’. There will be a mega-bail-out—a ‘Grashall Plan’—instead.
And when it happens, the markets will rally on the news.”