Germany’s Wolfgang Schäuble is 'relaxed' about Greek exit from the euro
By Ambrose Evans-Pritchard
8:31PM GMT 27 Jan 2015
The likelihood of “'Grexit' has risen to 35pc, according to Holger Schmieding at Berenberg Bank Photo: AFP
A top German body has called for a clear mechanism to force Greece out of the euro if the left-wing Syriza government repudiates the terms of the country’s €245bn rescue.
“Financial support must be cut off if Greece does not comply with its reform commitments,” said the Institute of German Economic Research (IW). "If Greece is going to take a tough line, then Europe will take a tough line as well."
IW is the second German institute in two days to issue a blunt warning to the new Greek premier, Alexis Tsipras, who has vowed to halt debt payments and reverse austerity measures imposed by the EU-IMF Troika.
The ZEW research group said on Tuesday that the EU authorities should order an immediate stress test of banks linked to Greece, and drive home the threat that they are willing to let a Greek default run its course rather than cave to pressure. “Europe should clearly signal that it is not susceptible to blackmail,” it said.
Germany’s finance minister, Wolfgang Schäuble, said in Brussels that debt forgiveness for Greece is out of the question. “Anybody discussing a haircut just shows they don’t know what they are talking about.”
Mr Schäuble said he was sick of having to justify his rescue strategy. “We have given exceptional help to Greece. I must say emphatically that German taxpayers have handed over a great deal,” he said.
In a clear warning, he said the eurozone is now strong enough to withstand a major shock. “In contrast to 2010, the financial markets have faith in the eurozone. We face no risk of contagion, so nobody should think we can be put under pressure easily. We are relaxed,” he said.
Officials in Berlin are irritated that Mr Tsipras has gone into coalition with the Independent Greeks, a viscerally anti-German party that seems to be spoiling for a cathartic showdown over Greece’s debt. “This increases the risk of a head-on collision with the international creditors,” said Holger Schmieding, from Berenberg Bank.
Mr Schmieding said the likelihood of “Grexit” has risen to 35pc. He warned that Mr Tsipras could be in for a reality shock after making “three impossible promises to his country in one campaign”. The risk is that he will end up “ruining his country” like Argentina’s Peronist leader Cristina Kirchner. “Vicious circles can start fast,” he said.
Sources close to Mr Tsipras say he is convinced that German leaders are bluffing and will ultimately yield rather than admit to their own people that the whole EMU crisis strategy has been a failure. Markets do not agree. Credit default swaps measuring bankruptcy risk in Greece rocketed on Tuesday by 248 points to 1,654, but those for Portugal, Italy and Spain barely moved.
Jürgen Matthes, IW’s international director, said Europe must be ready to punish violators in order to uphold the eurozone’s austerity strategy and avert a collapse of discipline. “We have set up a crisis prevention strategy that relies on conditionality. If this is not enforced in the Greek case, everybody will say they want the same thing,” he said.
“Syriza succeeded in selling an illusion that Greece can end the reforms and stop paying the debt, and still stay in the euro. This is impossible. If they do that the European Central Bank cannot accept collateral guaranteed by the Greek government,” he said.
“This will force the Greeks to return to the drachma and that will cause massive disruption. There will a government default, corporate defaults and bank defaults. The financial system will simply break down,” he said.
Mr Matthes said a deal may be possible that extends the maturity yet further on Greek debt but argued that the effective interest rate being paid is already 2pc, far lower than the headline average of 4.2pc.
The new Greek finance minister, Yanis Varoufakis, told The Telegraph that Syriza wants the target for the country’s primary budget to be cut from 4.5pc to 1pc of GDP, freeing enough for the new government to fund its social programme of free electricity and school lunches for the poor, and tax relief for low-earners.
The IW said a range of 3pc to 4pc is the best that Athens can hope for, and only if it also delivers on an overhaul of the tax system and a raft of reforms.
Mr Matthes warned that Syriza cannot hope for softer terms from Italy, Spain and France, since the taxpayers of these countries have lent almost as much to Greece per capita as have the Germans.
“There is not going to be flexibility in the Eurogroup, nor any coalition of southern states. There is real money at stake,” he said.
Mr Schäuble said he was sick of having to justify his rescue strategy. “We have given exceptional help to Greece. I must say emphatically that German taxpayers have handed over a great deal,” he said.
In a clear warning, he said the eurozone is now strong enough to withstand a major shock. “In contrast to 2010, the financial markets have faith in the eurozone. We face no risk of contagion, so nobody should think we can be put under pressure easily. We are relaxed,” he said.
Officials in Berlin are irritated that Mr Tsipras has gone into coalition with the Independent Greeks, a viscerally anti-German party that seems to be spoiling for a cathartic showdown over Greece’s debt. “This increases the risk of a head-on collision with the international creditors,” said Holger Schmieding, from Berenberg Bank.
Mr Schmieding said the likelihood of “Grexit” has risen to 35pc. He warned that Mr Tsipras could be in for a reality shock after making “three impossible promises to his country in one campaign”. The risk is that he will end up “ruining his country” like Argentina’s Peronist leader Cristina Kirchner. “Vicious circles can start fast,” he said.
Sources close to Mr Tsipras say he is convinced that German leaders are bluffing and will ultimately yield rather than admit to their own people that the whole EMU crisis strategy has been a failure. Markets do not agree. Credit default swaps measuring bankruptcy risk in Greece rocketed on Tuesday by 248 points to 1,654, but those for Portugal, Italy and Spain barely moved.
Jürgen Matthes, IW’s international director, said Europe must be ready to punish violators in order to uphold the eurozone’s austerity strategy and avert a collapse of discipline. “We have set up a crisis prevention strategy that relies on conditionality. If this is not enforced in the Greek case, everybody will say they want the same thing,” he said.
“Syriza succeeded in selling an illusion that Greece can end the reforms and stop paying the debt, and still stay in the euro. This is impossible. If they do that the European Central Bank cannot accept collateral guaranteed by the Greek government,” he said.
“This will force the Greeks to return to the drachma and that will cause massive disruption. There will a government default, corporate defaults and bank defaults. The financial system will simply break down,” he said.
Mr Matthes said a deal may be possible that extends the maturity yet further on Greek debt but argued that the effective interest rate being paid is already 2pc, far lower than the headline average of 4.2pc.
The new Greek finance minister, Yanis Varoufakis, told The Telegraph that Syriza wants the target for the country’s primary budget to be cut from 4.5pc to 1pc of GDP, freeing enough for the new government to fund its social programme of free electricity and school lunches for the poor, and tax relief for low-earners.
The IW said a range of 3pc to 4pc is the best that Athens can hope for, and only if it also delivers on an overhaul of the tax system and a raft of reforms.
Mr Matthes warned that Syriza cannot hope for softer terms from Italy, Spain and France, since the taxpayers of these countries have lent almost as much to Greece per capita as have the Germans.
“There is not going to be flexibility in the Eurogroup, nor any coalition of southern states. There is real money at stake,” he said.
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