German Political Leaders No Longer Want to Support Greece

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German lawmakers of the ruling CDU/CSU parties are apparently content with letting Greece default and pushing it out of the euro area. Michael Meister (leader of the CDU's parliamentary caucus and its finance spokesman)  and Micheal Fuchs (a deputy CDU floor leader) opined yesterday that it is time for Greece to go.

Bloomberg reports:

“A Greek exit from the euro would pose a “significantly smaller” risk of contagion to the rest of the currency area than two years ago before Greece asked for aid, two lawmakers from Chancellor Angela Merkel’s party said.

“The whole reason why we jumped into action wasn’t necessarily out of sympathy with Greece, but rather because we said that there could be a shockwave to the financial system,” Michael Meister, deputy parliamentary caucus leader for Merkel’s Christian Democratic Union, said in a phone interview today. “I think the scale of the threat from Greece has diminished.”

[…]

Greece will have to exit the euro area as it struggles under a mountain of debt, unable to regain its competitiveness without having its own currency to devalue, Michael Fuchs, another deputy CDU floor leader, said in an interview yesterday.
For Greece, “the problem is not whether they are capable of paying their loans — they will not, not at all, never,” Fuchs said by phone from his Berlin office. Greece is still a “special case” and the other 16 euro members will resolve their debt problems and retain the currency, he said.

Fuchs dismissed the prospect that letting Greece go would trigger speculative attacks against indebted countries such as Spain or Italy. Italy is a “rich” country and banks would be able to withstand any contagion effect, said Fuchs, who also coordinates economic policy for the CDU caucus in the lower house of parliament, or Bundestag. Talk of contagion from Greece would be “right if we’re talking about two years ago.”

The comments by Merkel allies break a taboo of the CDU leadership by airing sentiment that Greece must leave the euro it can’t fulfill the terms for aid. Merkel’s Bavarian sister party, the Christian Social Union, last week reinforced its position that member states unwilling or unable to commit to necessary reforms should be given the chance to exit the euro area.”

We would of course agree with Fuchs that Greece will never be able to repay its debt. That much has been clear to anyone with rudimentary math skills for a long time now. It would have been best to take the necessary steps arising from this conclusion when the Greek crisis first flared up over 20 months ago.

We are far less certain however that 'letting Greece go' won't lead to a wave of selling in the bond markets of other euro area nations. For one thing, market participants will be faced with having to assess the growing likelihood that others will eventually follow Greece. The widely held notion that Greece is 'unique' is only true insofar as it is further along on the road to insolvency and fiscal disintegration than other nations. In terms of competitiveness, there are several others that face the exact same pressures, with Spain very high up on the list. In terms of government indebtedness, there is for instance Portugal, which we continue to believe will come immediately into the crosshairs of the markets once Greece has fallen off the wagon.

The idea that a credit crisis can be 'contained' has been proved mistaken so many times by now that one is astonished that people are still holding on to it. Yes, there are of course fundamental differences that argue strongly in favor of places like Italy. But losses in one sector of the credit markets invariably lead to losses elsewhere, as the margin clerks strike. It is an effect that is always observed during financial panics: the 'fundamentals' no longer matter – correlations as a rule increase,  as what matters is only 'sauve qui peut'.

As we have mentioned before, the problem of Greece exiting the euro would not only concern the losses lenders would face on its government debt: every cross-border private-sector credit claim would likewise become dubious overnight. A financial panic would most assuredly be on.

Greek finance minister Evangelos Venizelos

Greek finance minister Evangelos Venizelos

(Photo via:AP)

What Would Happen to Greece if it Exits the Euro?

It is clear that before any positive effects on exports and the current account balance would manifest themselves as a result of a currency devaluation, Greece would be faced with an economic catastrophe. All the foreign credit claims denominated in the euro would essentially become unpayable, which would result in a wave of bankruptcies. Bank runs would intensify and  lead to a raft of coercive measures by the government – savers and depositors would likely find their savings and deposits forcibly converted into new drachmas overnight.

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