Greece Plan B

Bankrupt but Firmly in the Euro

A secret German government plan would let Greece default on its debts but remain in the euro.
  • Why it matters

    Why it matters

    The German government’s plan to allow for a Greek default, while maintaining the country in the euro, could bring the currency’s crisis to an end.

  • Facts


    • A German government plan would allow Greece to default on its debts and remain in the euro.
    • The plan was first reported by Die Zeit, Germany’s leading weekly newspaper.
    • The plan hinges on Greece’s support, which will be probed next week at an IMF meeting in Washington.
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The German chancellor’s most important plan is not put away in a drawer. It is not saved on a computer hard drive, and you can’t download it from the Internet. Officially, it doesn’t exist.

It is the Plan B – B for bankruptcy of Greece, a sovereign debt default that could bring the country’s long-running fiscal odyssey in the euro zone to a close.

The plan is known to Chancellor Angela Merkel, the German economics minister, Sigmar Gabriel, and to Finance Minister Wolfgang Schäuble. Christine Lagarde, managing director of the International Monetary Fund is privy to it, as is Mario Draghi, president of the European Central Bank.

This weekend, all of the parties involved will be meeting at the spring IMF conference in Washington. The Greek finance minister, Yanis Varoufakis, will be there too. They will talk about the state of the global economy and financial market regulation. Behind the scenes, the big topic will be Plan B.

There is a simple reason why no one wants to talk about this plan publicly. Even a mere admission that it exists could have devastating consequences. Angela Merkel wants to keep Greece in the euro, because she fears its exit would weaken Europe, and may pose uncomfortable questions about her own role in the financial rescue.

If it were to become public that the German government was preparing for such an eventuality, investors and savers would pull their capital out of Greece, worsening the current dire situation. They would in effect bring about exactly the bankruptcy Ms. Merkel prefers to prevent.

Because no one wants to confirm the existence of such a plan, one must look for the clues in the description of a Plan B.

Such as those statements by a high-ranking currency official who said that they are preparing “for everything” internally, and that there is no “ban on thinking.”

Or the remark by a financial regulator that because of a possible currency reform he will not “book a summer vacation in Greece.” There are many clues like that, and they help paint a picture of what a Plan B would look like.

“If the euro fails, then Europe fails,” has been Angela Merkel’s mantra since the outbreak of the crisis.

It is based on two scenarios worked out by the German government in recent weeks. Under the first scenario, Greece remains in the euro, but partially satisfies its creditors and fulfills at least a large part of its reform requirements. The remaining aid resources are then disbursed from the current rescue program and a new program is negotiated.

But Greece could still run out of money. Last week, for example, the Greek government scraped enough together in the last minute to transfer the debt-service installment due to the International Monetary Fund.

Many of these deadlines are still pending, and it is perfectly possible that the money from Brussels will not arrive in time.

This is where Plan B would come into play.

Because so far, a Greek sovereign debt default has been considered the moment when Greece would have to leave the currency union.

Under such a situation, the ECB would no longer be able to provide Greek banks with euros. Then the country would have to introduce its own currency sooner or later — exactly what Plan B is designed to prevent.

The plan uses a trick: Greek banks would be supplied with so much fresh capital that, despite a national bankruptcy, they could still conduct financial transactions with the central bank.

And to prevent the Greeks from bringing their money outside of the country during this period, exporting capital would be legally limited.

“If the euro fails, then Europe fails,” has been Ms. Merkel’s mantra since the outbreak of the crisis.

That has been the German chancellor’s standard cry of solidarity with the financially weakened countries in crisis who have swallowed the bitter reform medicine administered by Brussels, Berlin and Frankfurt.

She recently repeated exactly this sentence during a debate on Greece in the Bundestag.

But you have to read it differently today.

What is crucial is what Ms. Merkel did not say. She did not say if Greece should leave the common currency, the euro would fail.

Therefore, one can take from her sentence that, for her, the currency is more important than the fate of any one individual country, in this case Greece.

From Ms. Merkel’s point of view, the currency is in danger if a country successfully opposes the standards put in place in Brussels.

As a result, if the government in Greece demonstrates credibly that it is implementing reforms, then the euro will not be taken from it.

However, the country has largely lost its credibility with the German negotiators. They see Greece on par a country like Iran: The mistrust is so great, that the Greeks must make an advance payment for concessions to receive more money or leniency from the ECB.

Plan B provides for the situation in which the euro zone central bank, in agreement with the heads of E.U. governments no longer finances the Greek banks. Greece would de facto no longer be a member of the currency union. That would be the second scenario: a Grexit, the so-called Greek exit.

But even in event of a Grexit, the German chancellor wants to tie Greece to Europe. Therefore, the country would receive additional aid from Brussels for the transition.

E.U. experts would also support the Greeks with their currency changeover.

A group at the ECB has already been working on the complicated logistical details of a return to the drachma. Iraq is as an example for how things can be done. The United States had new bills printed at a British printer and transported them to Baghdad on 27 jumbo jets.

As an alternative, Greece, like Serbia and other Baltic states, could simply continue using euros in circulation as a form of payment.

That would simplify the situation from a logistical standpoint, but have one crucial disadvantage: The Greeks would have no control over their own money supply and exchange rates, because they would no longer be on the rate-setting council of the ECB.

There are also scenarios being worked out in which the country uses two currencies in tandem for a period of time.

A whole set of other problems would then need to be solved.

From the ECB’s standpoint, an exit from the currency union would only be legally possible if Greece also left the European Union, the 28-nation bloc stretching from Ireland to Estonia, on Russia’s door.

Therefore, a special arrangement would have to be worked out. It would also have to be clarified if Greece could re-enter the currency if its economy is rehabilitated, and what would happen to Greece’s euro-denominated debt.

The big unknown in the situation is Greece’s reaction to the plan, which after all did not originate in Athens.

It cannot be ruled out that the Greek government may reject offers of aid and turn to new allies.

Recently, former French President Valéry Giscard d’Estaing and Helmut Schmidt, the former German chancellor and an early supporter of the euro, called for a “friendly exit” of Greece in French business daily Les Échos. The article is on the desks of many decision makers in Berlin and Frankfurt.


This article first appeared in German weekly Die Zeit. To contact the author:

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