22nd May 2022

Germany preparing to bail out Greece

  • EU leaders are set to discuss the exact details when they meet for an informal summit at the Bibliotheque Solvay in Brussels on Thursday (Photo: andres rueda)

Clear signs emerged on Tuesday (9 February) that Germany and other eurozone members are considering a bailout plan for Greece.

Reports suggest financial support is likely to come in the form of guarantees or bilateral loans, with EU leaders set to discuss the exact details when they meet for an informal summit on economic issues in Brussels on Thursday.

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German Finance Minister Wolfgang Schäuble told officials in Berlin on Monday that he had concluded there "was no alternative" to a rescue plan, reports the Wall Street Journal citing an anonymous source.

The Financial Times quotes German officials as saying that the steep decline in the euro and pressure on bond prices has forced Berlin to "take a significant step" to deal with the Greek debt crisis.

Recent weeks have seen Greece come under tremendous pressure from financial markets due to doubts over the Greek administration's capacity to push through tough austerity measures, leading to fears of a possible sovereign default and contagion to other eurozone members.

Athens will face a major test on Wednesday with Greek public sector workers set to strike over the government's spending cut plans. The protests are set to cause grounded flights, shut government offices and schools and limited hospital operations.

Bailout method?

The European Investment Bank, the main provider of long-term EU loans, ended all speculation on Tuesday that it might become involved in a Greek bailout.

"The EIB's mission and statute do not allow for bailouts in terms of budget deficits or balance of payments support to individual member-states," Philippe Maystadt, the EIB president, said in a statement.

News that European Central Bank chief, Jean-Claude Trichet, will be flying back from Australia for Thursday's summit helped to lift markets on Tuesday, although eurozone rules also prevent the central bank from bailing out national governments.

Non-eurozone members Sweden and the UK have suggested that the International Monetary Fund is best placed to supply financial support to Greece, although EU officials have widely rejected this method.

"We don't need to call in the IMF," EU economic commissioner Joaquin Almunia told the European parliament in Strasbourg on Tuesday.

Another option is the creation of a special bailout fund. "When Europe was created, they created solidarity funds for new entrants, but not for the euro members. This is what is needed now," said economist Joseph Stiglitz, currently advising the Greek government, on British television on Tuesday evening.

A final decision on the plan may not come this week but Germany is thought to favour guarantees as the most efficient way to prevent the spread of the debt crisis.

Moral hazard

Whatever the final option, eurozone politicians will be keen to avoid a situation of moral hazard whereby chronic overspenders like Greece appear to be getting off easy.

Mr Almunia told MEPs he hoped leaders at Thursday's summit would offer "clear support" for Greece "in exchange for clear commitment [from the Greek authorities] that they will meet their responsibilities. "You don't get support for free," he stressed.

Taxpayers in Germany and other eurozone members involved in the Greek rescue plan will essentially take on the risk involved in providing Greece with guarantees or a large bilateral loan.

However, policy makers appear decided that the risks associated with taking no action are far greater. As well as preventing a possible default, a resolution to Greece's problems would help calm investor concerns over the health of public finances in Portugal and Spain.

German and French banks also have considerable exposure to the Greek economy, including billions of euros in loans to private individuals and companies.

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