Is Germany Prepared For A Greece Exit?

As the world looks forward to the outcome of meetings between German Chancellor Angela Merkel and French President Francois Hollande later in the week, it’s likely that Athens will make an exit from the eurozone soon as Berlin is unlikely to commit further funds for Greece, says Artur Fischer, co-chief executive of Boerse Berlin AG.

Since Germany goes to elections next year, conservative parties would be very reluctant to give more money fearing electoral backlash. Since Greece’s problems are systemic and require wide ranging structural reforms, extending bailout-linked austerity deadlines are of little use because Athens will need more bailout money in future even if concessions are provided now, he said.

Greece faces a real credibility crisis and it needs to convince Europe that the reforms carried out by the country are real and effective. Germany is unlikely to commit any further funds for Greece and Athens may just manage to secure an extension of its deficit reduction targets if the Troika of EC, the IMF and the ECB are convinced about its progress.

Due to the protracted crisis in Europe, the German economy has taken a hit with all the leading economic indicators turning negative. The German economy will probably witness higher unemployment and further difficulty going forward and in an election year politicians can ill afford such developments.

When asked if Germany is prepared for the consequences of a Greece exit, Fischer said the German banks are much better prepared for such an eventuality than they were a year ago. There’s a special working group in the German finance ministry that is monitoring the developments closely to ensure the economy is prepared for an eventual Greece exit.

Berlin is prepared for a Greece exit if latest media reports are to be believed, he noted.

It is important Greece honors its commitments because Spain and Italy may have to walk down the same path eventually. If a deal is not honored today, Germany and other European members will be very reluctant to commit funds in the future for Italy and Spain since sanctity of treaties will be lost, he noted.

When asked about the risks involved, Fischer said the international media has already predicted a Greece exit and markets have most probably priced in Athens leaving the eurozone.

Greece’s exit won’t happen overnight as some would like to believe; rather it’ll be a gradual process. As loans worth $10 billion become due, Athens will possibly issue IOUs resembling the drachma to creditors due to lack of funds. So it’ll be a soft approach wherein the country will have two currencies for some time. As more loans mature, it will be in the best interest of Greece to leave the monetary union eventually. It wouldn’t be a nightmare scenario and can be done in a guided way, Fischer added.

That being said, downside risks to the credit event would remain. However, risks arising in Germany by committing more money that it doesn’t have will be much higher which Berlin can ill afford, he pointed out. You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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