Last-Minute Talks

Greece's Euro Exit Draws Near

Parthenon, Athenian Acropolis (3/4 perspetive, facade), Athens cityscape. Athens, Greece.
European take-over?
  • Why it matters

    Why it matters

    With the markets nervous, a Grexit could have unforeseen consequences for other euro zone countries, particular fragile southern European economies.

  • Facts


    • The Eurogroup of euro zone finance ministers are meeting on Thursday at 3 p.m. CET in Luxembourg.
    • Chancellor Merkel told the German parliament on Thursday morning that Greece needed to find the will to reach a deal.
    • The Greek Central Bank warned that a default could see the country leaving not just the euro zone but also the E.U.
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Addressing the Bundestag this morning, Chancellor Angela Merkel was one of the few people still sounding positive on the prospects of reaching a deal with Greece to keep the financially strapped country in the euro currency.

“I’m still convinced: Where there’s a will, there’s a way,” she told lawmakers.

But the German chancellor also insisted, once again, that Greece needed to find the will to reach an agreement with its lenders — which means making politically unpopular cuts to government and social spending.

“Taking responsibility and solidarity go hand in hand,” she added, making no indications of any willingness in Berlin to compromise.

While she said the euro zone “had to be a success” she also argued that it was far more robust than five years ago when the Greek debt crisis first flared up.

Her words came just hours ahead of a meeting of euro zone finance ministers in Luxembourg on Thursday afternoon. However, there is little expectation that the ministers will manage to breach the impasse over Greece’s bailout program.

Yanis Varoufakis, Greece’s finance minister, said on Wednesday that a political decision was required to break the deadlock, and that would have to be made by the E.U. leaders at a summit next week.

Time is ticking, with a massive debt repayment due to the International Monetary Fund at the end of June when the Greek bailout program runs out. In the absence of a deal to unlock its remaining bailout funds, Greece could rapidly hurtle towards default, and eventually exclusion from the euro zone currency.

However, Athens’ radical left wing government won’t sign up to all the conditions set by its creditors, the IMF, European Central Bank and European Union, saying that the austerity measures won’t help the Greek economy recover and that its people have suffered too many cuts over the past few years.

For Germany, the biggest contributor to the €240 billion Greece has received so far, these reforms, such as pension cuts and VAT hikes, are a necessary step to making the country’s economy more viable.

And while Ms. Merkel has emphasized her deep desire to keep Greece within the euro zone, her finance minister, Wolfgang Schäuble, has consistently taken a tougher stance.

“Taking responsibility and solidarity go hand in hand.”

Angela Merkel, German Chancellor

On Thursday Mr. Schäuble told Bild, Germany’s most popular tabloid newspaper, that the question remained whether Greece would fulfill its bailout program commitments.

“Only on this basis could we release available funds. The principle applies: Aid only in return for achievements,” he said.

Yet the tone from Athens is hardening too.

On Wednesday Prime Minister Alexis Tsipras said he was prepared to declare the “great no” to creditors, using one of Greece’s best-known lines of poetry, after telling parliament on Tuesday that the IMF “bears criminal responsibility for the situation in the country.”


10-Year-Government Bonds Spreads-01


In a guest column for the Berlin daily, Der Tagesspiegel, published on Thursday, the Greek prime minister rejected the “myth” that German taxpayers are paying Greek pensions and wages. He said Greeks actually work longer than Germans and pointed out that pensions were the only source of income for many families. “It will only cause a further worsening of the already dramatic social situation,” he wrote.

“Our position is that if we have an economically feasible plan that doesn’t create recession and continue the debt trap, we will sign,” Greece’s chief negotiator, Euclid Tsakalotos, told BBC radio on Thursday.

He said that the Athens government could call fresh elections or a referendum if it cannot get an acceptable deal. “If Europe says you can do whatever you want, you can vote what you want but in the end you always have to follow the same policies, then we’ll have to reconsider with the Greek people what to do about that.”

These kind of statements are rattling both the country’s own central bank as well as the markets.

On Wednesday, in a sign of deep division in Athens, the Bank of Greece warned of disaster if a deal is not reached.

A failure of the talks for Greece would “first lead to a Greek national default, then to the exit from the euro zone, and most likely from the European Union,” the country’s central bank wrote on Wednesday.

The consequences would be high inflation, a deep recession, a dramatic fall in the income level and a major increase in unemployment.

Meanwhile investors are becoming increasingly nervous.

The loudest warning signals are coming from the financial markets, marked by both volatility and the fact that risk premiums for southern European sovereign bonds have risen in recent days to the highest level in at least a year.

That is a clear indication that there is increasing fear over contagion following a “Grexit,” or Greek exit from the euro.

Derivatives, with which investors can safeguard themselves against a Greek national default, are signaling an 81 percent chance that the country will not be able to pay off its debts. And the Greeks themselves withdrew €400 million from ATMs on Monday, which is almost twice as much as normal.

Investors are selling stocks and southern European bonds, and are losing their belief in a possible political solution. “We are preparing ourselves for a possible Grexit,” said Ulrich Kater, the chief economist at Dekabank. “In our opinion, the likelihood of it remaining in the currency union is just above 50 percent.”

British Prime Minister David Cameron and his advisers are also running through scenarios of a euro exit. “You will expect we are continuing to make sure we have the right plans in place and stepping up operations given where discussions have got to,” said a spokeswoman for the prime minister.

Martin Stürner, CEO at the asset manager PEH Wertpapier AG, does not assume that there will be a Grexit, but he warns that no one can calculate that “there will not be a domino effect like with Lehmans.”

According to a month-long survey of large-scale investors by Bank of America Merrill Lynch, they continue to consider interest-bearing securities too expensive. The funds managers have sold the stocks and increased the amount of cash in their funds. The liquidity ratio rose by almost one-tenth to 4.9 percent, which is the highest percentage in six months.

The urge for more security is based on the misgivings over Greece’s future. Many fund managers are calculating for a negative outcome of the debt poker game. Forty-two percent of the investment managers believe that debt-strangled country will be unable to pay. Fifteen percent think that the country will leave the euro zone.

“The likelihood of a negative result of the poker surrounding Greece is increasing,” said Reinhard Cluse, an economist at the Swiss bank UBS. At the same time, he said, a last-minute solution for the debt-stricken country remains his main scenario.


Aid to Greek Banks-01


“The negotiations over Greece’s debts appear to be as lengthy as Odysseus’ serpentine trip home from Troy and are burdening global stock markets,” said Mark Burgess, chief investment officer at Columbia Threadneedle Investments.

The share of European stocks in the funds will be reduced, also because the prices have recently gone up sharply, he said. The variations in price in the stock markets have recently increased considerably. The corresponding V-Dax for German standard stocks, for example, has been swinging more than it has for months.

That is about more than Greece. Investors fear a risk of contagion for other European markets. The UBS warns of a “clearance sale” on the markets if it were really to come to a Grexit. The markets would not yet adequately reflect this risk.

“The likelihood of a negative result of the poker surrounding Greece is increasing.”

Reinhard Cluse, Economist, Swiss bank UBS

But these would likely affect the stock markets in countries on the periphery of the euro zone more than the sovereign bonds. The reason is that unlike the bonds of euro zone countries, stocks do not have the support that comes from purchases made by the European Central Bank. Since March, the ECB has been buying more than €60 billion in bonds per month, and the lion’s share of them are sovereign bonds.

Investors are seeking security again with their investments, so they are primarily buying German government bonds. The focus has especially been on the 10-year government bonds, which has current yields of only about 0.8 percent, after scratching the 1 percent mark a week ago.

As result, many investors’ expectations for the Eurogroup meeting on Thursday have been dampened.

Mr. Kater said the focus of the meeting absent new suggestions will likely be “exit management,” or what measures could be used to make a Grexit somewhat organized.


Ruth Berschens is Handelsblatt’s bureau chief in Brussels, leading coverage of European policy. Ingo Narat is an editor with Handelsblatt’s finance section.Thomas Sigmund is the bureau chief in Berlin, where he directs political coverage. Siobhán Dowling is an editor with Handelsblatt Global Edition. To contact the authors:,,,

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