Berlin tries to calm markets riled by Greece

A raft of comments by senior German politicians raising the spectre of an "orderly default" for Greece and even an ignominious eurozone exit sent the euro to a 10-year low as traders worried the debt crisis was worsening.

But a spokesman for Germany's Economy Minister Philip Rösler, who is also vice chancellor, sought to allay these fears, saying: "Our common goal is the stability of the euro and we want Greece to stay in the euro."

At the same news conference, Chancellor Angela Merkel's spokesman said that Germany "assumes that Greece is doing everything it can" to implement strict austerity measures to battle its deficit woes.

"Our goal is quite clear: We want to stabilise the eurozone as a whole," Steffen Seibert said.

After a meeting between Merkel and European Commission President Jose Manuel Barroso, the two leaders issued a statement saying they were "agreed on the overwhelming importance of the euro for Europe and Germany."

"Stability and growth in euro countries are the decisive pre-conditions for a stable euro," the pair said, according to a statement issued by the German government.

Rösler himself had contributed to the market fears by writing in an opinion article in Monday's edition of the conservative Die Welt daily that Europe could no longer rule out an "orderly default" for Greece.

"To stabilise the euro, we must not take anything off the table in the short run," Rösler wrote.

Also fanning the flames were comments by the general secretary of the Free Democrats (FDP), junior coalition partners in Berlin, suggesting that Greece's euro membership was in doubt.

"It is our goal that Greece stays in the eurozone, that Greece implements its savings measures," Christian Lindner told ARD television. "But we must consider what happens if the Greeks are not in a position to do this."

"The Greeks must decide themselves whether they want to stay in the euro or not ... it should not be a taboo," added Lindner.

"Rumours are spreading that the German government is hoping to end the Greece aid. It is tempting to believe these rumours, as everything seems to fit," said Ulrich Leuchtmann, an analyst at Commerzbank.

Both German and US 10-year bond yields hit historic low points as investors shunned risky deals and bought assets seen as safe during times of financial turmoil.

Also fuelling financial market fears was an article in Der Spiegel news weekly reporting that Finance Minister Wolfgang Schäuble doubted that Greece could avoid a default.

The magazine said that Finance Ministry officials in Berlin were considering two scenarios should Greece go bankrupt: one where the country remained in the eurozone and another where it reverted to its former currency, the drachma.

Hans-Werner Sinn, president of the influential Ifo economic institute in Germany, told reporters that a Greek default "would not be the end of the world but a liberation for the country."

He said that Greece needed to devalue its currency by 20 or 30 percent. "To do that, they need to leave the eurozone. It would be the least bad scenario," Sinn said.

Despite seeking to calm the waters, Berlin stuck to its tough line that Athens needed to fulfil its international commitments to receive its next tranche of aid.

"Our line on Greece is clear: We will help, but only under strict conditions," said Seibert. If Greece is not able to live up to its commitments, "then the next tranche

cannot be paid. That is quasi-automatic," he said.

Holger Schmieding, an analyst at Berenberg Bank, warned of the damage that that would cause.

"A German 'no' to further support for Greece is a serious risk, although it is not the most likely scenario yet," he said.

However, if this were to happen, "it could weigh on financial markets, depress business and consumer sentiment and exacerbate the near-term downside risks to the German and overall eurozone economy."

AFP/mry