Tuesday

4th Oct 2022

Confidence ebbs in Greece's ability to stay in euro

  • Close-up of euro coin. IMF chief economist: 'The numbers [for Greece] are not good' (Photo: alles-schumpf)

Experts in Germany and the Czech Republic are losing faith that Greece will be able to stay in the single currency despite its multi-billion bail-outs.

The negative feeling was voiced in two newspaper interviews over the weekend.

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Clemens Fuest, an Oxford University economist and an advisor to German finance minister Wolfgang Schauble, told Greek newspaper To Vima on Sunday (8 January) that private bondholders will have to write off more than the 50 percent of Greek debt agreed at an EU summit last October.

He warned that even this may not be enough to stop a default, however.

"To my view, Greece has already defaulted ... I believe that the best thing would be if one honestly says that the Greek government cannot repay its debt. In such a way, a better settlement could be achieved," he said.

Miroslav Singer, the head of the Czech central bank, told the Hospodarske Noviny newspaper in remarks published on Monday that unless the EU pours in more money, Greece will have to leave the euro.

"If there is not the will to give Greece a massive amount of money from European structural funds, I do not see any other solution than its departure from the eurozone and a massive devaluation of the new Greek currency," he noted.

"So far Greece has been given loans that served mainly for buying time and for rich Greeks to move their money out of the country. This lowers the trustworthiness of Europe."

The EU and the International Monetary Fund (IMF) in 2010 agreed to lend Greece €110 billion. In 2011, they gave the nod to a top-up loan of €109 billion. The money is being paid out in tranches on the basis of Greek conformity with related austerity demands. The next slice is due in March.

IMF chief economist Olivier Blanchard in an interview with CNBC on Friday also predicted extra pain for private lenders. "The numbers [for Greece] are not good ... There'll have to be substantial haircuts [debt write-offs]," he warned.

IMF pessimism was confirmed on Monday when German magazine Der Spiegel cited an internal IMF memo saying Greece will have to quit the single currency unless private investors take bigger losses, the EU gives more money or Greece sells more state-owned assets.

Blanchard in his blog recently noted that gloomy statements have a tendency to become self-fulfilling prophecies.

"Perceptions matter: once the 'real money' investors have left a market, they do not come back overnight ... Not much happened to change the economic situation in the eurozone in the second half of the year. But once markets and commentators started to mention the possible breakup of the euro, the perception remained and it also will not easily go away. Many financial investors are busy constructing strategies in case it happens," he wrote on 21 December.

For his part, Greek central bank governor George Provopoulos on New Year's day told Greek press that a return to the drachma would be "hell ... a nightmare."

Provopoulos predicted the new drachma would lose up to 70 percent of its value, creating fuel and food shortages and disabling the Greek police and army. He added that Greece might have revert to a barter economy for a period of up to two and a half years while the drachma was gradually put back into circulation.

Germany makes Greece pay with sovereignty for new bail-out

Greek sovereignty was taken down another peg by eurozone leaders on Thursday, as Germany demanded a "durable" supervision on the ground of its economic policy-making under the terms of a second €130 billion bail-out.

Merkel wants 'permanent' supervision of Greece, warns of war

Peace should not be taken for granted if the euro fails, German chancellor Merkel told MPs Wednesday ahead of the eurozone summit. Greeks deserve respect for their sacrifice, she said, but their government has to be put under "permanent" supervision.

Merkel urges Greece to implement debt deal

Chancellor Merkel has warned Greece it will not get any more EU money unless it finalises details of its second bail-out, such as how much private debt should be written off.

Exclusive

EU officials were warned of risk over issuing financial warning

The European watchdog for systemic economic risk last week warned of "severe" threats to financial stability — but internal notes show top-level officials expressed "strong concerns" over the "timing" of such a warning, fearing publication could further destabilise financial markets.

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