May 24, 2012

No Mercy for Greece After Summit: Germany

Contingency plans ordered for Greek euro exit; ECB emergency borrowing rises

Although a Wednesday European Union summit meeting ended with Greece being urged by leaders to remain in the joint currency bloc, Germany did not back down on its stance that Athens must adhere to austerity measures already agreed to. Countries had already been directed to work on contingency plans should Greece leave the group, and emergency borrowing at the European Central Bank (ECB) rose in the wake of a funding cutoff to four of Greece’s banks.

Reuters reported that although President Francois Hollande of France pushed for joint euro bonds, highlighting the change in regime in the wake of former President Nicolas Sarkozy’s departure, Chancellor Angela Merkel of Germany wasn’t having any of it. Nor was she inclined to cut Greece any slack.

The main topic of the informal get-together was a discussion of how to stimulate economic growth, but the Greek situation loomed large and the meeting dragged on into the night. Merkel voiced her opposition to euro bonds and to allowing Greece to back off on its austerity promises.

Regarding the former, she said that a much closer fiscal union among the nations in the euro zone must be achieved before such bonds can be discussed. "There were differences in the exchange about euro bonds," she was quoted saying after the meeting ended. Merkel has been opposed to such joint bonds from the beginning and has not softened her stance.

On Greece’s efforts to change the terms of its bailout, she was equally firm, saying, "We want Greece to stay in the euro, but we insist that Greece sticks to commitments that it has agreed to."

Three officials were cited as the source of news that countries in the group were told via a Monday teleconference to prepare for a possible Greek exit from the euro zone. The teleconference was among members of the Eurogroup Working Group (EWG), which is made up of experts who work for euro zone finance ministers.

Greece’s finance ministry denied that any such agreement was reached, but Finance Minister Steven Vanackere of Belgium was quoted saying, "All the contingency plans [for Greece] come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid." His account was confirmed by two other senior E.U. officials.

In addition, a document was cited saying such an exit could potentially cost the E.U. and the International Monetary Fund (IMF) 50 billion euros ($62.82 billion) to ease the transition and ensure an “amiable divorce.”

Meanwhile, emergency overnight borrowing at the ECB rose to its highest level since mid-March, when the Greek debt restructuring deal drove it up. Nearly 4 billion euros on Thursday added to what has been a steady increase in such borrowing, apparently pegged to a cutoff by the ECB of four Greek banks from their normal means of funding.

The ECB does not reveal the users of its emergency funding, but the four banks have apparently been driven to use emergency liquidity assistance (ELA) rather than the ECB’s normal overnight borrowing window. ELA is more costly and charges 0.75 percentage points more interest than normal ECB funding; in addition, it can only be used once ECB policymakers have approved the move.

"If [funding at the overnight window] ...rose above 5 billion, I'd start to be concerned. But I would need to see more of a pattern," one London-based money market trader was quoted saying. The trader, who requested anonymity, continued, "This could be a failure of one payment late in the day. If it was a liquidity issue, it was probably from one of the southern banks. But it might just as well have been between two very well-known large banks."

Another topic of conversation at the informal summit was the discussion of proposals from the European Commission (EC) for a legal framework to accommodate the closure or reorganization of insolvent banks in a way that can avoid a repeat round of taxpayer bailouts.

Considering the looming possibility of a Greek exit and the state of Spain’s banks—on Wednesday Spain bailed out Bankia to the tune of 9 billion euros, but still insisted it would not seek a bailout—the subject was prominent in the talks. However, there too the chance of Merkel giving her approval was considered slim.

In an editorial published Thursday, Bloomberg editors pointed out that although Germany is considered the “responsible adult” and Greece the “profligate child,” Germany has also been bailed out. Saying that Germany’s banks were “Greece’s enablers,” the editorial went on to say that German banks had built up substantial exposures to the currently debt-troubled countries of the euro zone.

“By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford,” the editors said.

They continued, “When the European Union and the European Central Bank stepped in to bail out the struggling countries, they made it possible for German banks to bring their money home. As a result, they bailed out Germany’s banks as well as the taxpayers who might otherwise have had to support those banks if the loans weren’t repaid.” That happened as an effect of the structure of the euro, and amounted to far more than Germany’s direct contribution to Greece’s bailout.

Should Greece exit the euro and runs result on banks in Spain, Italy and Portugal, much of Germany’s capital could be wiped out, it continues—not to mention the effects on Germany’s economy and on the E.U. itself. To avoid such a fate, it concludes, Germany will have to do all that it has so far refused to do and then go even farther, preserving the euro system lest the collapse take it down along with the rest.

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