Greek Gamble

Deal or No Deal?

Merkel-Greece-Reuters
Waving to her secret meeting partners, German Chancellor Angela Merkel.
  • Why it matters

    Why it matters

    Emergency talks last night between leaders of Germany, France, the European Central Bank and the International Monetary Fund are a sign for markets that the Greek crisis has now reached the highest level of urgency.

  • Facts

    Facts

    • It remains unclear whether Greece’s can finance its next big re-payments to the International Monetary Fund, including €300 million on Friday and €1.2 billion in tranches by the end of this month.
    • International creditors, including the IMF and euro zone countries, have demanded Greece re-commit to reforms before they release a final €7.2 billion payment from an existing aid package.
    • Some media reports have suggested creditors could also release a separate €9 billion in funds that were dedicated to Greece’s banks.
  • Audio

    Audio

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It was supposed to be a meeting to discuss the more mundane topic of Europe’s “digital agenda.”

Instead, a Monday night gathering of leaders in Berlin was turned into a crisis meeting over Greece, the beleaguered member of the euro that could be forced to default on its state debts and even exit the 19-nation currency bloc within the next month.

The unannounced meeting was a veritable “who’s who” of the key European players in the ongoing Greek drama. German Chancellor Angela Merkel had originally planned to meet just with French President Francois Hollande and E.U. Commission President Jean-Claude Juncker. With Greece on the brink, the gathering was expanded to include the International Monetary Fund’s managing director, Christine Lagarde, and the European Central Bank president, Mario Draghi, both of whom flew in specially.

Notably absent was Greek Prime Minister Alexis Tsipras, who Handelsblatt on Monday reported was hoping to get a last-minute invite. Instead, the meeting seemed designed for international creditors to iron out a final common line in the ongoing crisis talks with Athens.

For his part, Mr. Tsipras surprisingly announced that he had already submitted his own counterproposal late Tuesday morning, telling reporters in Athens: “We have prepared a realistic plan for Greece to end the crisis.”

This week could be decisive in the more than five-year old crisis over Greece and its place in the euro zone, a 15-year-old currency bloc that has expanded its membership and now stretches from Ireland in the west to Latvia in the east of the European continent.

“I don’t subscribe to the view that the euro zone becomes stronger if it loses its weakest members. On balance, it’s something negative for the euro zone.”

Kristian Tödtmann, Analyst, DekaBank

For five years, Greece has battled to bring its state finances under control and has been unable to pay its government debts without international aid, led by the European Union, which has totaled nearly €240 billion.

Whether Athens can pay its bills through the end of this month without additional help from the international community seems doubtful. Key repayments are due to its international creditors – €300 million to the International Monetary Fund by Friday and another €1.2 billion in three tranches to the IMF by the end of the month.

Is there really a breakthrough in the making? Government statements following the secret meeting didn’t shed much light. A spokesman in Berlin said only that the leaders agreed to move forward with “real intensity” and remain in close contact in the coming days.

For markets, the mere fact that such a top-level meeting took place in Berlin has given some hope that a last-gasp solution to the Greek question can be found this month.

“The fact that they meet shows that they remain constructive that the problem can be resolved, which is positive. On the other hand, we have to be aware that the endgame is approaching and the side effect of this brinkmanship approach is that risks of unintended accidents rise,” Mauro Vittorangeli, leading fixed-income strategist for European bonds at Germany’s Allianz Global Investors, told Handelsblatt Global Edition.

“Our base case scenario remains that a last-minute agreement can be achieved, which will allow Greece to buy time and stay in the euro zone, but we expect volatility to remain high in the short term,” Mr. Vittorangeli added.

Merkel-Draghi-Meet-Reuters
Behind closed doors in Berlin: German Chancellor Angela Merkel, French President Hollande, EU Commission President Juncker and ECB President Draghi. Source: Reuters

 

Kristian Tödtmann, a credit market analyst with the German savings bank DekaBank, noted that the world’s bond and currency markets have been viewing the Greek crisis at something of an arms length so far – waiting for the final verdict over whether the southern Mediterranean country that sparked the euro zone’s debt crisis five years ago will wind up staying in the currency area or not.

The euro has lost value against the dollar over the past few days after the IMF’s Ms. Lagarde was quoted Friday saying there was a “potential” for Greece to exit the euro zone, but was stable on Monday.

Even if Greece is forced to leave the euro zone, many market watchers are confident that global investors will not abandon the euro as a whole. Mr. Tödtmann noted that unlike at the height of the euro zone’s debt crisis in 2010 and 2012, there is now a sense Greece is an outlier, and its exit from the currency area will not prompt questions over who’s next.

“Our base case scenario remains that a last-minute agreement can be achieved...but we expect volatility to remain high in the short term.”

Mauro Vittorangeli, Allianz Global Investors

Nevertheless, ending the illusion that membership in the currency is “irreversible,” as the ECB’s Mr. Draghi once put it, is clearly going to have a major impact on market sentiment.

“I don’t subscribe to the view that the euro zone becomes stronger if it loses its weakest members,” said Mr. Tödtmann. “On balance, it’s something negative for the euro zone.”

Media reports of Monday’s high-level meeting have varied hugely, but all point to the fact that any final deal to keep Greece in the euro will still take days to be agreed on and presented to the Athens government for approval.

“There is real progress in our discussions, a solid basis for moving forward, but we’re not there yet.” Pierre Moscovici, the E.U.’s commissioner for economic and currency affairs, told the radio station France Inter Tuesday morning.

 

Greeces Debts-02

 

International creditors have a number of options to keep Greece on a lifeline over the next month, but they have so far resisted handing over any funds without more concrete pledges from Greece’s Mr. Tsipras that he will follow through on existing promises to get the country’s debts back in line.

Most importantly, the European Union and the IMF could choose to hand over the final €7.2 billion that was part of Greece’s existing €240 billion aid package. A Spanish radio station, Cadena Ser, reported that the European Union was also considering releasing €9 billion from a separate bailout fund that was originally earmarked for Greece’s banks.

The next moment to watch will come Wednesday, when ECB President Mario Draghi appears before the press to give the results of the central bank’s monthly rate-setting meeting in Frankfurt. A participant in Monday’s meeting, Mr. Draghi may offer some details of what was discussed.

Failing a solution by the end of this week, the Greek situation is likely to eclipse another one of Ms. Merkel’s high-profile events. The German chancellor welcomes leaders from the G7 bloc of industrial nations to Bavaria over the weekend.

Ms. Merkel had hoped the G7 summit would focus on development issues. Unless Greece counts, she’s likely to be disappointed.

Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin, covering financial, economic and political issues. To contact the author: cermak@handelsblatt.com

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