In the Zone A Fig Leaf to Athens

While Greece threatens to leave the euro, Germany's economy is surging to new highs. As German banks and businesses downplay the impact of a Greek exit from the common currency, Chancellor Merkel dramatically opened the door on Thursday for a compromise.
Are the lights about to go out in Greece?

Perhaps Angela Merkel already knew Germany was facing a perception problem when she opened the door Thursday night to a potential face-saving compromise with struggling Greece.

"Europe has always distinguished itself by its ability to find compromises," the German chancellor said Thursday night in Brussels, where  E.U. leaders were meeting to hammer out a deal that could keep Greece in the euro zone. "We still have a few days left," she added.

Three days before a key deadline that could determine Greece's future in the 19-nation euro zone, new growth figures Friday have once again highlighed the divergent paths within Europe's economy. While Greece flirts with a euro exit, and possible economic collapse, Germany is doing just fine.

Europe's largest economy is growing much faster than economists expected, its GDP climbing 0.7 percent -- more than twice as fast as initially reported -- in the final three months of last year, according to Germany's statistical agency. For the whole of 2014, the German economy grew by 1.6 percent. Germany's benchmark stock index, the DAX, briefly rose above 11,000 points for the first time.

No wonder many German businesses believe their economy could handle Greece leaving the euro.

For a good while now, Greece has no longer had the potential to destabilize the entire monetary union. Jörg Krämer, Chief economist, Commerzbank

Greece's economy, by contrast, remains the weakest link in the chain, contracting 0.2 percent in the fourth quarter, the first decline after three quarters of slight growth. The euro zone as a whole grew 0.3 percent in the final quarter of the year, and just under 1 percent in 2014.

Amid the divergence, the prospect of Greece’s departure from the currency union — a “Grexit” — has become a distinct possibility once again. But Greece's new political leaders, led by the far-left Syriza party, don't seem to realize just how dire the situation has become.

The Syriza government in Athens has unilaterally canceled an existing bailout agreement with the euro zone that has been the country's financial lifeline, conditioned on harsh economic reforms. It is demanding a restructuring of the deal to ease austerity's burden on Greece, where more than a quarter of the population is unemployed.

Jeroen Dijsselbloem, who chairs the so-called euro zone group of finance ministers, on Thursday reportedly told Ms. Merkel and other E.U. leaders that a disaster was pending, after finance ministers failed to make any progress towards a deal the day before.

German officials say it was Greece's finance minister, Yanis Varoufakis, who pulled out of an initial step towards compromise at the last minute on Wednesday. Mr. Varoufakis failed to even present his own plan, according to participants. Many finance ministers pleaded with the Greek finance minister to stick to its reform commitments.

The Spanish and Portuguese finance ministers reminded Greece that they, too, had undergone a tough austerity path.

The European Central Bank has already provided €60 billion in emergency loans to keep the Greek financial sector afloat, and on Thursday extended the ceiling of these loans - known as Emergency Liquidity Assistance - by another €5 billion, Handelsblatt has learned.

This central bank money will likely run out by the middle of next week, though it could be extended again if needed.

The ECB's lifeline heaps even more pressure on Monday as the next critical deadline in Greece's latest odyssey. The meeting is the next opportunity for finance ministers from the euro zone to haggle out a compromise. Should those talks fail, the prospect of a Greek exit from the euro zone rises significantly, according to Jörg Krämer, the chief economist of Germany's Commerzbank.

The danger is that Greece could actually leave the euro zone in a huff -- a possibility none of its neighbors in the currency zone want to see, a German government official said. Another E.U. official said the mood was very pessimistic by Thursday. "Perhaps the Greeks simply don't understand how negotiations in the euro group are done?," the official said.

Britain’s prime minister, David Cameron, let it be known his government is playing out a Grexit scenario. He is not the only one.

Quelle: dpa
Still smiling, but for how much longer? German Finance Minister Wolfgang Schäuble and Greek counterpart, Yanis Varoufakis.
(Source: dpa)


The heads of Germany's large banks are also examining possible impacts, but they feel prepared. The word from financial circles is that precautionary measures are being fine-tuned daily. “Here it is not a matter of suddenly yanking a lever; for weeks now, there have been adjustments in the strategic response to a possible Grexit,” said one financial source, who declined to be named.

Lines of credit and the associated collateral have been examined. In recently concluded contracts with a link to Greece, consideration has been given to the increased risk of default. If a Grexit does occur, preparations have been made to counteract increased volatility in the markets with technical back-up and personnel plans.

Many international banks are likewise testing their internal systems. According to industry sources, the banks include Citigroup, JPMorgan Chase and Goldman Sachs. They are checking whether currency platforms and internal payment systems could deal effectively with the re-introduction of the Greek drachma and possible capital controls.

“We have taken the plans out of the drawer that we already made two, three years ago,” said a source from a bank in London.

Key sectors of the German economy are on alert too. “We are looking at all possibilities,” said Olaf Koch, the chief executive of retailing giant Metro, though he said he doesn't expect Greece to leave the euro zone. The company operates 10 consumer electronics stores of the Media-Markt chain in Greece.

Many other companies feel well-prepared. The Germany-based tourism firm Tui has safeguarded all contracts with hotel owners against currency risks. Airport operator Fraport has analyzed the effects of a Grexit but has, for the moment, issued an all-clear with regard to its own business.

“If Greece were to leave the euro, that wouldn't damage tourism in Greece over the long term,” a spokesperson for Fraport said.

That is because any national currency that were to be re-introduced in Greece would immediately be devalued, leading to competitive prices in Greece. Germans could get cheaper beach holidays.

Fraport is also involved in acquiring 14 regional airports in Greece for €1.2 billion ($1.36 billion). The company is the preferred bidder but could still withdraw from the purchase — as could the Greeks. “We still intend to carry out the transaction,” the spokesperson said.

Greece's exit would be a Lehman disaster to the power of two. Barry Eichengreen, U.S. economist

For the world's largest reinsurance company, Munich Re, an “at least partial breakup of the currency union” continues to be one of the conceivable scenarios being played out, said the company chief executive Nikolaus von Bomhard.

Still, the insurance sector has tended to play down the issue of a Grexit. German life insurance firms, which invest €800 million of their customers' money in capital markets, hold almost no Greek government bonds.

“The involvement of life-insurance companies in Greece is so slight as to be scarcely measurable,” said Axel Wehling, managing director of the German Insurance Association (GDV).

The crucial question is what the fallout would be in other euro countries if Greece left the currency union. Experts are divided about the answer.

U.S. economist Barry Eichengreen, an expert on international monetary matters, said “Greece's exit would be a Lehman disaster to the power of two.” The bankruptcy of the U.S. investment bank Lehman Brothers in 2008 helped unleash the worst economic crisis since the Great Depression of the 1930s.

Marcel Fratzscher, head of the German Institute for Economic Research, also considers the consequences to be almost incalculable: “A Grexit would hurt Greece most of all, but Europe and Germany would also pay a high economic and political price.”

Economists at the American bank Morgan Stanley expect a collapse of the euro. The currency could lose a fourth of its value against the dollar and sink to 90 U.S. cents, according to one study. A euro was worth about $1.14 on Friday.

Other economists believe an exit would be more manageable. Michael Hüther, the head of the Institute of the German Economy, sees little danger of a contagious infection. He notes that other European countries that were once in crisis - Portugal, Spain, Ireland -  have for the most part adhered to their own reform programs, sometimes with constructive suggestions of their own.

“In contrast to the situation three or four years ago, the risk premiums on government securities from Portugal, Spain and Italy haven't increased significantly in reaction to the irritations coming from Hellas (Greece),” Mr. Hüther said, adding Greece is a “special case.”

Mr. Krämer of Commerzbank also considers the consequences of a Grexit to be manageable, noting that most of Greece's debts are now in public and not private hands. “For a good while now, Greece has no longer had the potential to destabilize the entire monetary union."

Mr. Krämer said he was certain, however, that Greece's exit would “plunge the country into economic chaos.”


Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin. Jens Münchrath covers economics and monetary policy in Düsseldorf. Ruth Berschens is Handelsblatt's Brussels bureau chief. Christopher Cermak covers finance and economics for Handelsblatt Global Edition in Berlin. To contact: [email protected], [email protected], [email protected] and [email protected]