Something's Gotta Give

Ambrose Evans-Pritchard:

The policy never had any chance of working for Greece. The IMF under Strauss-Kahn went along with the EMU agenda, pretending all was well, sacrificing the Greeks to gain time for the European financial system to build up safety buffers.
Thomas Wieser, the head of the European Working Group handling Greece, said today that press reports of further debt restructuring and official "haircuts" in the current Troika talks are pure fantasy.
If that is so – and what he means is that Germany, Holland, Finland, and Austria will not tolerate a haircut on their holdings of Greek debt – then the creditor countries are trying to maintain a ridiculous illusion for their own internal political reasons.
Greece cannot claw its way out of a 190pc of GDP debt load. The official haircut is coming sooner or later, and it will be an explosive political moment.
Chancellor Angela Merkel will have to account for direct losses to the Bundestag. A line will have to be written into the German budget covering the X billions of euros. Other line items may have to be cut. Welfare support for Germans, perhaps.
Having insisted for over two years that German taxpayers face no risk of loss on the Club Med rescue packages – and having indeed told them it generated a profit – she will have to explain why this has gone horribly wrong.

The Germans are going to have to realize they can't forever run up trade surpluses and not end up with bad debt.  The time is coming when they have to decide if they are invested in the common currency or not.  Their prosperity in recent years has come because the Greeks, Spanish and Italians were spending.  Now that the debts are coming due, something has to give.