A EUROZONE CHAPTER 11
¶9. (C) DB Chief Economist Thomas Mayer told Ambassador Murphy
he was pessimistic Greece would take the difficult steps
needed to put its house in order. A worst case scenario,
says Mayer, could be that Germany pulls out of the Eurozone
altogether in 20 years time. In 1990, Germany's
Constitutional Court ruled that the country could withdraw
from the Euro if: 1) the currency union became an
"inflationary zone," or 2) the German taxpayer became the
Eurozone's "de facto bailout provider." Mayer proposes a
"Chapter 11 for Eurozone countries," which would place
troubled members under economic supervision until they put
their house in order.
So much for a quiet week in Europe now that the Greek situation has been temporarily resolved with a new PM.
Full cable presented below:
C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 000181
SIPDIS
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA
(WHITTINGTON), DRL/ILCSR AND EUR/CE (SCHROEDER, HODGES)
LABOR FOR ILAB (BRUMFIELD)
TREASURY FOR SMART, ICN (NORTON), IMB AND OASIA
SIPDIS
E.O. 12958: DECL: 02/12/2020
TAGS: EAID EFIN ECON PREL EUN GM GR PGOV
SUBJECT: GERMANY RELIEVED BY EU SUMMIT OUTCOME ON GREECE
Classified By: ECONOMIC COUNSELOR INGRID KOLLIST, REASONS: 1.4 (B) AND
(D)
¶1. (C) SUMMARY: Chancellor Angela Merkel's government
welcomed the decision taken at the EU's February 11 informal
summit in Brussels not to provide financial assistance, for
the moment, to cash-strapped Greece. German officials
believe a bailout is not needed at this time, and that
extending a lifeline to Greece would have carried too many
risks. One major fear in Germany is that "saving" Greece
would lead to other needy Eurozone members expecting the same
treatment. Another concern is that extending an explicit
guarantee for Greece could weigh on Germany's own good
standing in the markets, ultimately raising its borrowing
costs. While German government officials do not totally rule
out an IMF program for Greece if push came to shove, most
consider this eventuality highly unlikely, especially in
light of the European Central Bank's strong opposition. In
fact, the German government, the ECB and private German
economists are downplaying the seriousness of Greece's
predicament and its potential impact on stability of the
Euro. They agree, however, that the crisis could have
longer-term consequences for EU institutions and how they
interact with member states that stray off course. END
SUMMARY.
NOT IN THE MOOD
---------------
¶2. (C) Prior to the February 11 EU Summit in Brussels, there
was much hair pulling in Berlin over the wisdom of
participating in some sort of Greek rescue. No one savored
the idea of explaining to German taxpayers, already concerned
about Germany's record deficit, that they would be footing
the bill for the irresponsible behavior of another country.
A Finance Ministry official explained to us that many Germans
felt disgusted by the situation in Greece: "While Germans
have spent the past decade tightening their belts and
improving their competitiveness, Greek civil servants still
earn 14 months' salary per year." A recent editorial in the
German daily Frankfurter Allgemeine Zeitung (FAZ) asked
rhetorically whether Germans would need to work until age 69
just to finance early retirement for Greek workers. With
important upcoming elections in the state of North
Rhine-Westphalia, bailing out Greece would not be a vote
winner.
OFF THE HOOK
------------
¶3. (C) The German government was, in fact, "relieved" that
the European Council meeting on February 11 decided not to
put concrete assistance on the table at this time. Wolfgang
Merz, Director for European Financial Affairs, German
Ministry of Finance, told us that while Germany stands ready
to throw a lifeline if the Greek government truly runs
aground, Greece currently has access to capital markets and
needs no outside assistance. The key to overcoming the
crisis will be the Greek government's implementation of the
planned austerity measures, said Merz. Bernhard Speyer, Head
of Banking, Financial Markets and Regulation at Deutsche Bank
(DB) Research, agreed that the EU struck the right balance:
"The decision gave reassurances that Greece would not be
abandoned, but kept the pressure on the Greeks by not yet
putting cash on the table."
¶4. (C) Stepping in with assistance at this point carried too
many downside risks, according to Merz. Legal questions
aside, a German or EU bailout of Greece might have harmed
Germany's credit worthiness, thereby raising its own
borrowing costs. Merz added that a bailout would certainly
have set a bad precedent for other Eurozone countries, such
as Spain and Portugal, experiencing similar stresses. (Merz acknowledged, however, that these two countries' problems
were less acute -- a sentiment echoed by Speyer.)
¶5. (C)Still, there is some skepticism that Greece's austerity
program will get the country's finances on the right track,
even if fully implemented. Merz said an IMF bail out
remained on the table, despite the official line that the
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situation in Greece could be addressed within the EU.
IMF RESCUE? RESOUNDING NO FROM ECB
----------------------------------
¶6. (C) According to Karlheinz Bischofberger, Deputy Head of
the Financial Stability Department at the European Central
Bank (ECB), the likelihood that the IMF will be asked to bail
out Greece is "zero." Greece does not have a balance of
payments crisis, so there is first and foremost no basis for
the IMF to step in. Bischofberger added that apart from the
damage to the ECB's reputation an IMF intervention would
inflict, it was uncertain that the IMF could even succeed in
doing the "political dirty work" of forcing Greece to
implement a structural adjustment program. DB Research's
Speyer concurred, adding that it would undermine the
credibility of EU institutions to manage a crisis.
REPORTS OF MY DEATH ARE GREATLY EXAGGERATED
-------------------------------------------
¶7. (C) Talk of a possible break-up of the Eurozone is
"absurd," according to Moritz Kraemer, Managing Director,
Standard and Poor's. He noted that Eurozone membership is
still seen as highly desirable, and there was absolutely no
incentive to exit, despite the allure of devaluation. Any
country that tried to leave the Eurozone would get hammered
in the credit markets, exacerbating any underlying structural
problems. S and P estimates that Greece's rating in the case
of an exit would drop to "BB " or lower, i.e. below
investment-grade. Even today, Greece's rating of "BBB " is
higher than it was in 1997 ("BBB-") before joining the common
currency.
¶8. (C) While the current crisis may have revealed an
"Achilles heel" of the Eurozone, it may present
opportunities, according to Klaus Masuch, Head of the EU
Country Division, Directorat General of Economics, ECB. The
crisis is a "healthy warning signal" that Eurozone members
must conduct "sound national policies in line with the agreed
rules." It also underlines the necessity of better
integration and coordination of member state fiscal policies.
The Euro will come out of this crisis strengthened, he said.
Better and stricter early warning and surveillance systems
will be in place, and the Stability and Growth Pact will
ultimately be reinforced. DB Research's Speyer agreed, adding
that the crisis could make EU member states proceed more
cautiously with enlargement.
A EUROZONE CHAPTER 11
---------------------
¶9. (C) DB Chief Economist Thomas Mayer told Ambassador Murphy
he was pessimistic Greece would take the difficult steps
needed to put its house in order. A worst case scenario,
says Mayer, could be that Germany pulls out of the Eurozone
altogether in 20 years time. In 1990, Germany's Constitutional Court ruled that the country could withdraw
from the Euro if: 1) the currency union became an
"inflationary zone," or 2) the German taxpayer became the
Eurozone's "de facto bailout provider." Mayer proposes a "Chapter 11 for Eurozone countries," which would place
troubled members under economic supervision until they put
their house in order. Unfortunately, there is no serious
discussion of this underway, he lamented.
COMMENT
-------
¶10. (C) Chancellor Merkel is clearly relieved she does not,
for now, have to explain to the public why the German
government is running up its own deficit to bail out
debt-laden Greece. Still, the German government appears
prepared to step in as a last resort if needed and is
cognizant that German banks (such as Hypo Real Estate and
Deutsche Bank) and insurance companies (Allianz) have
significant exposure to Greek sovereign debt. The crisis is
also viewed -- within the German government as well as within
the ECB -- as a way to exert greater influence over the
public finances of profligate Eurozone members. Some
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Christian Social Union (CSU) politicians are even using the
crisis to promote the candidacy of Bundesbank President Axel
Weber as next ECB President, arguing that Weber's selection
would send a signal that Eurozone stability is paramount.
One way or another, the consequences of the Greece crisis
seem likely to outlive the immediate situation. One strong
possibility is that German influence over policy in the
common currency area will grow.
¶11. (U) Embassy Berlin and ConGen Frankfurt co-drafted this
cable.
Murphy
