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Berlin prepares for Greek insolvency

The Local · 11 Sep 2011, 09:22

Published: 11 Sep 2011 09:22 GMT+02:00

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His officials are reported to be preparing for several scenarios that might arise should Athens go bankrupt.

There are two possible outcomes, in the view of the ministry. Either the country stays in the euro zone, or it re-introduces its former currency, the drachma.

A key consideration in Schäuble’s thinking is the EU’s bailout mechanism, the European Financial Stability Facility (EFSF). A crisis summit in July made provision for expanding the mechanism’s powers.

Two key instruments of the EFSF could come into play in the event of a Greek bankruptcy. The first are contingent credit lines, which would help countries like Spain or Italy if investors were to stop lending them money following a possible Greek insolvency. In addition, banks in numerous euro-zone countries could be reliant on aid from the EFSF if they had to write off billions in Greek government bonds. This is likely to happen regardless of whether or not Greece holds on to the euro.

The governor of the state of Hesse, Volker Bouffier, like Schäuble a member of Chancellor Merkel’s conservative Christian Democrats (CDU), said that a mechanism should be developed quickly to allow countries to leave the euro zone.

“If the Greek government’s austerity and reform efforts are not successful, then we must ask ourselves if we don’t need new rules, that would allow for a euro-zone country to exit the currency union,” he told Der Spiegel.

Euro-zone leaders announced a €159-billion ($223-billion) rescue package for Greece in July, but Athens is having difficulty meeting the conditions to receive its next instalment of funding, with sufficient cash in reserve for only a few weeks.

Last Thursday, Schäuble warned Greece that it must fulfil the conditions set down by the euro zone if it wants more help with its debt crisis. He said it was "very premature" to talk about a second bailout package for Greece before it had implemented the reforms required to receive its first full disbursement.

Meanwhile Chancellor Angela Merkel has asked the German people to be patient with Greece. "What has been neglected over years cannot be done overnight," she told the Sunday edition of Berlin's Tagesspiegel newspaper, pointing to Germany's bid to rebuild the infrastructure in former communist East Germany after the fall of the Berlin Wall.

"Remember the reunification process," said Merkel who grew up in East Germany. "How much time it took in the early 1990s to rebuild new administrative infrastructures, share know-how and privatize."

"We must be patient," she said. However, she also called on the Greek Prime Minister George Papandreou not to waver in his reform drive. "Greece knows that credit is only available if it meets its obligations.”

Story continues below…

Papandreou vowed Saturday to stick to the austerity demands of his debt-ridden country's creditors despite mounting street protests against the measures.

“At the point where the eurozone is now ... every delay, every hesitation, every option other than strict compliance with our commitments ... is dangerous for the country and its citizens," he told a political gathering as about 25,000 anti-austerity protesters took to the streets nearby.

"Every time we have postponed or hesitated, it has cost us dearly," the premier said in his traditional post-summer break address, promising to take "all other necessary measures" to ensure the country meets its commitment to reducing the budget deficit. "We will prove wrong all those who are betting on the country to fail.”

DPA/AFP/The Local/smd

The Local (news@thelocal.de)

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Your comments about this article

10:13 September 11, 2011 by aceroni
It looks as if they want Greece to be the Lehmann Brothers of this round of market crisis
10:56 September 11, 2011 by Bushdiver
Sounds as if they are changing their stance on holding the Euro Zone together. (Schäuble said that a mechanism should be developed quickly to allow countries to leave the Euro Zone).

Yes Merkel, we remember the reunification process. We're still paying for it.
11:42 September 11, 2011 by nemo999
Whether Greece stay or goes is pretty much immaterial. The out come is going to be bad for all parties (Greece, other EU members states, the world). The path that is taken will determine who has the most pain and for how long, and the amount of contagion that will be spread in the EU. Does Germany keep it funds and minimize the pain and disruption here in Germany, or does Germany spend it money in other countries in an attempt to reduce the pain and disruption there? I do not know, but I do know that things are going to get much worse before we can even think about the situation getting better.

We did not get here over night and we will not get out of this mess over night.
11:52 September 11, 2011 by marimay
Well, I certainly hope this doesn't come as a surprise to anyone.
13:15 September 11, 2011 by storymann
There is no surprise here.

This will be a big hit for the ECB,and other institutions holding Greek Bonds,

I doubt this scenario is the last one, only the first one.

Had a Due diligence been done on Greece and Portugal they would have never been admitted into the euro zone.

This has dealt another severe blow to the credibility of the single currency's battered rulebook, the Stability and Growth Pact.

But to be fair a lot of this should be laid at the door of Goldman Sachs which helped obscure billions in debt from the budget overseers in Brussels.
14:08 September 11, 2011 by Sastry.M
And originally, both the Lehmann Bros.and Goldman Sachs are German Bankers. What factors that waylaid their spirit of support to New World economy and thoroughness in sorting out economic issues forcing to declared insolvency in the U.S should also be a concern of realistic investigation
18:26 September 11, 2011 by colrdoh
Don't worry about Greece/the Euro!

The political classes will sacrifice the German sheeple on the altar of their egos/financially catastrophic political experiments.
01:35 September 13, 2011 by _JD
Save Greece! Save the European Project! Those who propose a return to German nationalism would have us follow Wilders and Le Pen, and while some Germans may have forgotten, everyone else remembers the meaning of German nationalism, and they will tolerate it for about five minutes.

Germany profits from a depressed exchange rate, taking advantage of the other Europeans weaker status and then complains?!

German re-unification was only allowed (yes, allowed) by the other powers because of the commitment that German ambitions would be subordinated to the European project. Nothing has changed except that people's self interest is suddenly a bit less enlightened. A Marshall plan for Greece (not austerity) would build up a future market and be good for all.

If you're looking for someone to blame demand prosecution of all the bankers in New York (and Frankfurt) who've committed fraud and kicked off this mess.

European Federalism vs. Race Based Nationalism - the choice is clear.
17:20 September 13, 2011 by derExDeutsche
@ _JD

Bankers started this mess? Educate yourself about the true causes of the depression.


18:24 September 13, 2011 by ChuChu
My goodness JD, have you not heard the saying "Charity starts at home" ? What good will it do everybody if Europe bankrupts Germany as well with all their demands? Germans were NOT asked if they wanted the Euro or a united Europe!! EVERYONE I know is against this "everyone in the same pot" nonsense. Stop saying that if we want to look after our country that we are called racists. And a FEDERAL Europe??? God forbid that ever happens...we will ALL be poor and then who will bail us out? THE CHINESE????????
22:32 September 13, 2011 by jg.
_JD "European Federalism vs. Race Based Nationalism"

The last time I checked, being a national of one EU member state does not make me a different race from a citizen from one of the other member states. Personally, I cannot think of a better way to stir up nationalist hatred around the EU than by having economic policy dictated by unelected EU commissioners and the few countries that hold the balance of power.

A federal EU could only work if the various rules and treaties were followed - and one of the prerequisites is that the economies of the member states have to converge. It cannot work if only a handful of states are running sensible fiscal policies that lead to stability and low interest rates whilst the rest operate "spend today, pay tomorrow" policies, leading to huge debts, high interest rates and devaluing currency.

If Germany sinks more money into the debt-ridden states, it will only serve to delay (and deepen) the eventual defaults. It is obvious that many Euro zone countries will not or cannot implement the sort of austerity measures that would allow them to meet their treaty obligations - and Germany has not got enough money to bailout these countries indefinitely.
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