Some Greek politicians believe Germany still owes Greece more than $50 billion.

Last week I mentioned the (what seemed to me and much of the world) odd incident of Greek politicians talking about the need for Germany to pay its debts to Greece. I got this response from a Greek reader. Comments afterword.

"Dear Mr. Mauldin,

I am an avid reader and I just wanted to correct you about a comment in one of your articles, "The Pain in Spain", specifically:

'Somehow they forgot about the German government paying 115 million deutschmarks in 1960 -- not a small sum back then.'

This repayment of 1960 is undeniable. but the total amount owed was $10 billion ($3.5 billion for the return of the gold stolen and the repayment of the war loans Greece was forced into giving Germany, and $7 billion in war reparations awarded to Greece in 1946). As the DM/$ parity was then four for one, this means they gave Greece $29 million out of the $10 billion owed.

Germany also proclaims that they have given Greece over the years, in one form or another, €16.5 billion. But the fact of the matter is that despite these alleged payments, the issue of the war loans and gold is still not settled.

Greece has never stopped asking for the money to be paid back ... it is estimated that this sum owed now totals $70 billion [I assume the Greeks want interest – JM]. So even taking into account the €16.5 billion, more than $50 billion is still owed.

Helmut Kohl refused to even discuss the repayment, presenting as an excuse that this amount was owed by the whole of Germany and until Germany is unified the issue could not be discussed.

Guess what, Germany is unified....

Best Regards,
Anthony Kioussopoulos

P.S. Do not take my e-mail as a refusal to acknowledge the fault of successive Greek governments in creating this mess; just take it as a correction for a specific issue."

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The point here is not that Anthony is 100% right, though his statements have the ring of authenticity. The point is that the Greeks believe it. And thus my lack of surprise last week when I noted that leading Greek politicians of both the conservative and liberal parties were talking the same line. This is an issue that runs across the Greek political spectrum. And that makes the situation all the more intractable, as emotional responses are not the stuff of rational debates.

(I should note that if the US demanded payment from Europe of all the money we loaned them after the war, at full interest, our national balance would be a lot better. But I doubt that ever gets brought up, nor should it at a remove of 65 years.)

This week saw riots and a national strike as Greek unions demonstrated against budget cuts. Yet polls seem to indicate a majority of Greeks recognize the need for rather serious austerity measures. As I have documented, they really have no good choices, only very bad and disastrous choices. The austerity measures that will be forced on them by market realities if they default will be far worse than those they can self-impose over time. In fact, yesterday EU inspectors visiting Athens told authorities they see a deeper than expected recession.

Two very condensed reports from European media:

1. After the German magazine Focus ran an issue with a Photoshopped picture of Venus de Milo giving the middle finger to "Greek con artists" (referring to the fraud the Greeks perpetrated when they joined the EU by hiding debt), street protests demanding the boycott of German goods were organized in Athens and endorsed by the Greek administration. There was also name calling by the Greek administration, blaming Germany for all of Greece's economic and financial problems because the Nazis stole all of Greece's gold in World War II. In general, the Greek public believes that all this is just excuse-making on the part of the Government, but a boycott is loudly supported by members of all the public workers' unions. (Reuters report)  

The situation is exacerbated by news today that Greece needs to refinance $27bn of bonds in March, vs. the statements JUST TWO DAYS AGO that only half that amount was coming due, and then not until April and May.

2. Financial Times Deutschland reported the results of a poll of German banks that was conducted yesterday. No German bank polled said it would make any further investments in Greek sovereign debt. The following banks and building societies are at risk of collapse due to excessive Greek bond holdings: Hypo Real Estate ($13 billion exposure), Commerzbank ($7 billion exposure, and the bank was bailed out last year by the German government), LBBW ($4 billion), Bayern Landesbank ($2.2 billion). It should be pointed out that Greece is a small country, with 11 million people and a GDP of $313 billion that is running a trade deficit of $11bn. Banking experts generally stated that any private purchases of Greek bonds are now completely out of the question. Any future aid will have to be government to government, and that will exclude Germany, as Angela Merkel stated earlier in the week. Within the eurozone, there are no other countries outside of Germany that have, or can raise, any capital to invest in Greece.  (Hat tip to Steve Stough for the above points.)

For what it's worth, I do not see Germany bailing out Greece in the current climate. If Germany were to force Greece to undertake the severe measures they would be required to take for a bailout, the streets of Greece would be full of demonstrators denouncing Germany. I just don't see it happening.

If not Germany, who? France? Spain? Italy? They all have their own very real problems. Everyone else is too small. The US will not. Neither will China.

My guess is that at the end of the day (which will come soon) the IMF is going to have to step in. It will be a blow to European pride, but what else is there?

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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