From El Pais:
German Chancellor Angela Merkel and French President Nicolas Sarkozy announced just moments ago in a joint press conference that the European Union has suspended aid of 8 billion euros, which was scheduled in order to try to rescue the drowning Greece economy.
"We need a strong euro, with or without Greece," said Merkel.
My take: This move is a declaration of economic war. It puts a whole train of future moves in motion, in my view.
The Greek people will be apoplectic at this tactic. They will reject the bailout in a referendum out of spite. Greece will then default with perhaps as much as a 90% haircut. Greece and its banks will be insolvent. A sharp depression will ensue. Germany has now said it doesn’t care if Greece stays in the euro area. Greece will be ejected from the euro zone, relieving it from the sharpness of the depression.
Meanwhile, the run on other European countries will pick up steam as speculation about further defaults will be emboldened by this turn of events. Portugal will eventually default. Ireland will default on its bank debt. And Italy’s yield will shoot the roof. The question about bank solvency will be a crucial issue driving the move toward an ECB liquidity train. If the ECB backstops Italy, the euro will be saved. Otherwise, it is done. At a minimum, Greece will leave.
The rump euro or the new German currency will strengthen considerably. Germany’s export machine will collapse as the weakness of the German domestic economy and strength of Germany’s future currency arrangement will be a millstone around the neck of future German leaders.
It is all falling apart now.
Please identify the weaknesses in this train of events that could point to upside for one or all parties. I’d be interested to get some convincing pushback.