Germany Readies Surrender Over Greece

Germany may be getting ready to give up on Greece, as measures in the credit markets signal growing concern about the smaller nation’s ability to repay investors.

Yields on Greek two-year notes rose above 60 percent today for the first time. Credit-default swaps to insure the country’s five-year bonds and to speculate on government securities closed at an all-time high of 3,500 basis points on Sept. 9, according to CMA. The contracts are the highest in the world and more than three times the 1,134 basis points for Portuguese debt.

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.

“It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.”

Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets, and as investors raised bets on a default.

Geithner Weighs In

Protecting their banks and a hardening of rescue terms risk isolating Germany and unnerving global policy makers already fretting that the region’s political tussles are roiling markets and threatening growth. Underscoring the tone of weekend talks of Group of Seven finance chiefs, U.S. Treasury Secretary Timothy F. Geithner told Bloomberg Television that European authorities must “demonstrate they have enough political will” to end the crisis.

Lars Feld, a member of the German government’s council of economic advisers, said today that a “disorderly restructuring” of Greece may take place if the Greek government decides to get out of the euro zone.

“I don’t think this could be easily done,” Feld said in an interview with Bloomberg Television. “There are many, many technical difficulties and the contagion then would be much, much higher and much stronger than anything we observe” under an orderly restructuring, he said.

Slump in Euro

European bank credit risk has surged to an all-time high, according to the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers, and the euro fell last week by the most against the dollar in a year. Investors have doubts about whether Greece will implement austerity moves fast enough to get a sixth payment from last year’s 110 billion-euro ($150 billion) bailout.

The euro was down 0.6 percent today against the dollar at $1.3601, the weakest level since February.

The Greek government’s top priority is “to save the country from bankruptcy,” Prime Minister George Papandreou said in a Sept. 10 speech in the northern Greek city of Thessaloniki. “We will remain in the euro” and this “means difficult decisions,” he said.

More evidence of rifts at the heart of policy making was exposed with the unexpected Sept. 9 announcement that Juergen Stark, a German, will quit the European Central Bank’s executive board over his opposition to the ECB’s purchases of bonds from debt-laden countries.

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http://www.bloomberg.com/news/2011-09-12/germany-readies-surrender-in-fight-to-save-greece.html?cmpid=bit