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How I see the chain of events:
  1. Greece's deficit problem is covered up by the EPP as long as the conservative party rules. The problem is well known already on July 2009 Ecofin but made no public at the moment. More you can read on Handelsblad here.
  2. October 2009 - Papandreou wins the election. The new governments announces that the deficit is already almost double than predicted by the previous one. A violent attack starts by EU institutions to cover up their responsibilities. However, Greek spread remain under 200 basis points.
  3. End November 2009 - The ECB underestimates the situation and believes that the global crisis is over. Trichet says he will withdraw the extraordinary measure to provide liquidity. That spooks investors and sends Greek spreads well above 200 bps.
  4. May 2010 - Greek rescue and all that which is well known.
  5. Autumn 2010 - The ECB says it will not follow Fed's QE2 believing the euro crisis is over.
  6. October 2010 - Deauville
  7. The two previous steps force Ireland to seek rescue by the EFSF.
  8. Talks on the terms of the ESM - which will replace EFSF after 2013 - start.
  9. Socrates had decided not to enter the EFSF before the ESM rules have been set on March 25.
  10. December 2010 - The ECB has stopped buying Portuguese bonds and says so in public sending Portuguese spreads sky high.
  11. Socrates is ready to keep his defense by having provided enough financing until March 25, 2011. So he denies to join the EFSF.
  12. Late March 2011 - The ECB bullies Portuguese banks to stop financing their government with ECB liquidity (FT, "ECB blamed for Portugal aid request", April 11).  
  13. It is announced that decisions on the ESM are postponed for June.
  14. March 31, 2011 - Socrates replies with calling an early election. That means that there will be a caretaker government until then.
  15. It is made clear that ESM decisions will be postponed for September 2011.
  16. Socrates concedes. EPP has unlimited cards in this poker game.

Meanwhile, the narrative on Greece takes a U-turn. Suddenly the government that was praised for "unprecedented reforms" is described as "reform exhausted". This is to cover up that the Troika has failed on two basic promises on its side, while Greece has kept with most of its part of the deal. The deal was "you do as we say" (you follow the doctors orders, as DSK has literally said) and, first, you will have such and such macro performance, and, second, you will return to private markets on viable terms by 2012. However, the Troika predictions on growth/recession, unemployment, inflation etc. have already failed. It is clear that all indexes will develop far worse than predicted and the country will return to growth much later than anticipated by the Memorandum. Moreover, it is clear will not be able to return to the markets because the ECB has not provided the necessary liquidity for this to happen. That has nothing to do with Greece's performance. The markets are also closed for Ireland, Portugal and maybe soon for Spain also (Spanish spreads have already move above the unsustainability level of 200 basis points - Italy is yet a little below).

That how it looks like from here.

"Eurozone leaders have turned a 50bn Greek solvency problem into a 1,000bn existential crisis for the European Union." David Miliband

by Kostis Papadimitriou on Mon Jun 6th, 2011 at 03:36:04 PM EST

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