Merkel, Sarkozy Battle Over Greek Default

There is a great divide yawning between Germany and the rest of the eurozone over the question of whether Greece should be allowed to default. While Germany says it will do all it can to avoid such an event, France is desperate to avoid it at all costs.

A default would mean potential disaster for French banks as well as a possible loss of the country’s Triple-A credit rating. And if that goes, the financial rescue mechanism for all the eurozone could fall apart; France is the second biggest guarantor of the fund after Germany.

Bloomberg reported Friday that Angela Merkel, German chancellor, is pushing to prepare investors for an inevitable Greek default. Opposed to using the European Financial Stability Facility to recapitalize banks, something French President Nicolas Sarkozy is advocating, Merkel instead wants to wall off Greece from the rest of the eurozone without it departing the currency bloc entirely.

She was quoted saying, “We have to be able to put up a barrier. I don’t rule out at all that at some point we will have the question of whether one can do an insolvency of states just like with banks.”

However, Sarkozy is determined to “save” Greece, knowing that a default would threaten French banks with large exposures to Greek debt. A threat to the banks means a threat to France’s Triple-A credit rating, and that could in turn threaten the entire eurozone rescue mechanism. He is advocating using the stability facility to recapitalize banks, French banks in particular, to keep them humming along and prevent Greece from defaulting.