Germany Is Getting Ready To Give Up On Greece

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Greek Euro Exit: 60% Currency Devaluation, Default, Banking Sector Collapse

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Germany Readies Surrender Over Greece (Blooomberg, Sep. 12, 2011):

Germany may be getting ready to give up on Greece, as measures in the credit markets signal growing concern about the smaller nation’s ability to repay investors.

Yields on Greek two-year notes rose above 60 percent today for the first time. Credit-default swaps to insure the country’s five-year bonds and to speculate on government securities closed at an all-time high of 3,500 basis points on Sept. 9, according to CMA. The contracts are the highest in the world and more than three times the 1,134 basis points for Portuguese debt.

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.

“It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.”

Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets, and as investors raised bets on a default.

Geithner Weighs In

Protecting their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth. Underscoring the tone of weekend talks of Group of Seven finance chiefs, U.S. Treasury Secretary Timothy F. Geithner told Bloomberg Television that European authorities must “demonstrate they have enough political will” to end the crisis.

Lars Feld, a member of the German government’s council of economic advisers, said today that a “disorderly restructuring” of Greece may take place if the Greek government decides to get out of the euro zone.

“I don’t think this could be easily done,” Feld said in an interview with Bloomberg Television. “There are many, many technical difficulties and the contagion then would be much, much higher and much stronger than anything we observe” under an orderly restructuring, he said.

Slump in Euro

European bank credit risk has surged to an all-time high, according to the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers, and the euro fell last week by the most against the dollar in a year. Investors have doubts about whether Greece will implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($150 billion) bailout.

The euro was down 0.6 percent today against the dollar at $1.3601, the weakest level since February.

The Greek government’s top priority is “to save the country from bankruptcy,” Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki. “We will remain in the euro” and this “means difficult decisions,” he said.

More evidence of rifts at the heart of policy making was exposed with the unexpected Sept. 9 announcement that Juergen Stark, a German, will quit the European Central Bank’s executive board over his opposition to the ECB’s purchases of bonds from debt-laden countries.

French Banks

“Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” said Julian Callow, chief European economist at Barclays Capital in London. “This could complicate Germany’s involvement in additional bailout programs.”

At the G-7 gathering in the French port of Marseille, ECB President Jean-Claude Trichet and European Union Economic and Monetary Affairs Commissioner Olli Rehn said they knew nothing about the talk in Germany of the so-called Plan B to protect banks. French officials said they weren’t working on a parallel proposal and Bank of France Governor Christian Noyer said his country’s banks have the capital to withstand a Greek default.

BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Credit Agricole SA (ACA), France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said on Sept. 10.

Bond Losses

Moody’s said in June that the three banks were placed on review to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring,” and the companies’ current rating levels.

Among banks outside Greece, German lenders were the biggest holders of Greek government bonds, with a total of $14.1 billion at the end of March, according to consolidated banking statistics from the Bank for International Settlements. French banks followed with $13.4 billion. The German figure includes loans given by government-owned Kreditanstalt fuer Wiederaufbau as part of the first Greek rescue program.

The aim of the contingency plan is to shield German banks from losses from a possible Greek default, which has a more-than 90 percent chance of happening within five years, prices for insurance against default show.

The plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next portion of Greece’s bailout is withheld, said the three officials, who declined to be identified because the deliberations are being held in private. The successor to the government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

German Lawmakers

The discussions aren’t intended to shove Athens out of the euro, said Klaus-Peter Flosbach, budget-policy spokesman of Merkel’s Christian Democratic Union and the Christian Social Union in parliament.

“It would be of central importance to keep the possibility of contagion in the euro zone as low as possible,” Flosbach said in an e-mail. “In any case, we’re not looking into pushing Greece out of the euro zone.”

Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said Germany’s concern is broader than Greece, which is in its third year of a deepening recession, and centers on how its banks and economy would cope if the debt crisis spreads.

“Germany is preparing for the worst, which is that the crisis in the euro zone is going to be much bigger for everyone,” Erixon said.

Opposing Aid

German lawmakers, who are scheduled to vote Sept. 29 on a second Greek aid package and revamped rescue fund, stepped up their criticism of Greece after an international mission to Athens suspended its report on the country’s progress two weeks ago.

“There can be no doubt” that Greece must fulfill the terms of aid to receive it, German Finance Minister Wolfgang Schaeuble said in Marseille. “Everybody must stand by the agreements.”

With a loss in her home state of Mecklenburg-Western Pomerania, Merkel’s coalition has been defeated or lost votes in all six state elections this year as voters reject putting more taxpayer money on the line for bailouts. Merkel has also antagonized markets and fellow leaders by initially holding out against aid for Greece and demanding investors pay a share of the assistance.

German Polls

Fifty-three percent of Germans oppose further aid for Greece and wouldn’t save the country from default unless it fulfills terms of the rescue agreement, Bild am Sonntag reported, citing an Emnid poll of 503 respondents conducted Sept. 8.

French Budget Minister Valerie Pecresse said her nation would halt its loans to Greece if the country didn’t keep to its bail-out pledges, the Wall Street Journal reported, citing a television interview on French channel M6.

After European markets closed last week, Greek Finance Minister Evangelos Venizelos dismissed “rumors” of a default and said his nation is committed to “full implementation” of the terms of the July accord for a second aid package.

Budget measures including a special levy on real estate will be enough to meet targets set for 2011, Venizelos told reporters in Thessaloniki yesterday.

The market fallout served as the backdrop for the G-7 talks at which Canadian Finance Minister Jim Flaherty said Europe’s woes were the “number one” topic and that Greece may even need to quit the euro if it can’t consolidate its budget. Geithner said authorities “need to do whatever they can do to calm these pressures” and that rich European nations need to provide “unequivocal” support for their weak neighbors.

G-7 officials vowed to “take all necessary actions to ensure the resilience of banking systems and financial markets,” and to make a “concerted effort” to support a flagging world economy. They detailed no new policies.

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