Germany told to 'come clean’ over Greece

"Zero Risk" vs "End of Greece"

German Chancellor Angela Merkel must “come clean at long last” and admit that Greece will need help for another seven or eight years, the German opposition leader said over the weekend.

By Ambrose Evans-Pritchard

“The Greeks must stand by their commitment, but we must give them time. We cannot tighten the screws any further,” said Peer Steinbruck, the Social Democrat candidate for chancellor. He said the political and economic fall-out from Greek ejection from the euro would be devastating and must be avoided.

The plea came amid reports that Berlin is so worried that a Greek crisis would spin out of control that it is ready to back the next €31bn payment to Athens under its EU-IMF Troika rescue, despite failure to comply with the terms. Wirtschaftswoche, a German news magazine, said Greece’s parliament merely needs to vote on a list of detailed reforms.

It cited warnings from a top EU official that “domino-effect” dangers are too great to allow the ejection of Greece from EMU. Authorities across the world – including the Bank of England – fear a surge of capital flight from Portugal, Ireland, Spain, and Italy if the sanctity of monetary union is violated.

Diplomats say concerns go beyond financial damage. Both EU and US officials are worried that the fragile security system of the Western Mediterannean could start to unravel if Greece is alienated and withdraws from Nato under populist leaders in the future.

Washington has put intense pressure on Chancellor Merkel to accept a compromise that keeps Greece firmly anchored in the European bloc. Her ministers haves toned down their rhetoric in recent days.

François Heisbourg from the International Institute for Security Studies said an acrimonious Greek exit would be “extremely challenging”, leading to instability in the Balkans and opening the door to Russian meddling.

The apparent Troika deal gives Greek premier Antonis Samaras a chance to prove he can deliver an austerity package of €13.5bn, mostly cuts in pensions, benefits, and top civil service pay. His three-party coalition agreed on the “main points” in bruising talks last week.

Mr Samaras told the New York Times that there is “absolutely zero risk of Greece leaving the Euro” but he also said that lack of EU help would mean the “end of Greece”.

Payment of the next tranche may lift one cloud hanging over the markets but Greece’s drama has been eclipsed by events in Spain, where Catalonia’s drive for independence has rocked the country. The tense mood has not been helped by calls from top figures in Madrid for deployment of the Civil Guard to crush separatists.

Moody’s is expected to downgrade Spanish debt to junk status this week, which would make it harder to lure back global investors. The country is in limbo until premier Mariano Rajoy decides whether to request a rescue from the EU bail-out fund and sign a memorandum giving up fiscal sovereignty.

Analysts say the decision by Germany, Holland, and Finland to renege on a June summit deal to recapitalise Spanish banks directly may have hardened his will to resist. Paul de Grauwe from London School of Economics said the move by the AAA trio is a “disgrace”.