German Finance Minister Wants To Trade Puerto Rico For Greece, Another Great Deal For Germany

That Wolfgang Schaeuble, he’s such a jokester. The German finance minister took time out of his busy day of applying a the boot of pressure to the economic throat of the Greek economy to tell U.S. Treasury Secretary Jack Lew that he would trade Greece for Puerto Rico.

Trade Puerto Rico for Greece: Another deal that benefits Germany

“I offered my friend Jack Lew these days that we could take Puerto Rico into the euro zone if the U.S. were willing to take Greece into the dollar union,” Schaeuble was quoted as saying at an event in Frankfurt Thursday. Lew, the U.S. Treasury secretary, “thought that was a joke,” he was quoted as saying/joking in a Bloomberg report.

With $72 billion in troubled debt, Puerto Rico is one of the highest unemployment regions in the U.S. “dollar union.”  Greece, on the other hand, has debt levels estimated near $335 billion. Whatever the exact numbers, the relative value analysis is clear. At first blush, that trade might be a great deal Germany, whose hardened stance on Greece, choking off currency liquidity, appears to have generated results.

Germany is accustomed to having its way, as the very euro currency union primarily benefits the German economy more than others. If Germany had its own currency its value would be much higher than that of other Eurozone members. A lower currency helps encourage economic activity in a country. The free market system works by lowering currency values in troubled regions to spur economic activity while raising currency values in prosperous regions, naturally balancing economic activity. Germany is used to having its cake and eating it to, and they are likely to get their wishes, or at least something close to it, in the Greek deal.

Using currency liquidity to choke Greek economy was apparently a successful tactic

The Greek resistance government of Alexis Tsipras have apparently agreed to harsh austerity terms they were elected to oppose, sending a reform plan that, in part, kicks the can into the future. The German-led plan to restrict the euro currency into the Greek economy, suffocating the resistant Greeks with constraints that led to the ability to withdraw 60 euros per day, appears to have worked.

All that remains is for Germany to accept the agreement, which is said to have a few odorous components to which Schaeuble and Angela Merkel, Germany’s prime minister, might have to hold their nose and accept. The Germans have plenty of “encouragement” as a host of Eurozone members, including France, have broken ranks with the normally private and ritualistic society that rules Europe and publicly called on Germany to sign the deal.

While such displays of “public” encouragement might seem democratic from one perspective, the unelected economic gang of three pulling the Eurozon strings formerly known as the Troika might look at public displays of political thought the same as public displays of affection: best done behind closed doors.

There is one short term primary benefit to a deal.

Strong unregulated derivatives risk management plans executed by regulators likely to remain behind the scenes, and that’s good news

A deal for Greece to stay in the Eurozone family and agree to pay debt also would lesson concerns regarding the whisper issue, derivatives default. But the little reported risk management moves by regulators, described by CMEGroup Executive Chairman and President Terry Duffy as “unprecedented,” did not go to waste. The issue of unregulated derivatives risk management, and what has been described by sources familiar with the moves as “extraordinarily effective and coordinated action to engage in worst case risk management,” might again remain in the shadows.

If the Greek issue goes into the night with a whimper, those regulators and administration officials who developed and executed a plan to address a problem first raised by former Commodity Futures Trading Commission Chair Brooksley Born are the unsung heroes of the crisis. What has generally gone unnoticed is that for the first time since Born was abruptly removed at the CFTC for simply requesting study of the derivatives, shining light on what she considered a risk to the economy. The unsung work of regulators that put the needs of the U.S. economy ahead of powerful political lobbies advocating for derivatives have been successful for the first time since Born’s removal. Hopefully their work – and effective plans to handle the worst case – will not be diluted in the future by the most powerful political lobby in U.S. history.

In some risk management quarters, testing risk systems on a smaller Greek economy — dismissed by many mainstream economic pundits as insignificant — was viewed as a positive to stress test for the additional debt defaults that are a concern. Some say the work of these regulators, and their conclusions regarding risk management decisions, should be made public so that the risk management protocols become cemented. At a minimum, those behind the scenes will recognize their efforts to save the economy make them among unknown angles in what has been an odd and historic Greek tragedy.