Does Germany Want Greece to Default?
Senior Editor, CNBC.com
Germany is attempting to engineer a default on Greek bonds, according to a claim in BankingNews.gr, a Greek language business news site.
Despite an outward appearance of supporting a financial rescue, the website argues, “the actual position of Germany is that Greece should go bankrupt.”
Banking News argues that regardless of whether or not Greece gets the next installment of rescue funds, eventually it will default on its bonds. The only choice is whether or not Greece defaults and stays within the euro zone or is forced to leave.
It should be noted that officially, the German government supports a rescue for Greece. The accusation from BankingNews is not sourced to any official statements or documents. It is a speculative argument.
But it is worth asking: why might Germany prefer a defaulted Greece to a rescued Greece?
One answer might be the growing awareness of the potential for a financial domino effect if Greece is rescued. One of the conditions for Greece to receive the next installment of rescue funds is an agreement from private creditors to reduce the amount Greece owes them—the so-called “private sector involvement” or “haircut.”
The trouble with the PSI is that it may set off a wave of similar demands from deeply indebted countries. If Greece can have its outstanding debt reduced, why shouldn’t other countries also get this treatment?
“The Irish are asking that question already, and I'm sure the Portuguese and Spanish will soon be asking the same thing,” writes former investment adviser Marshall Auerback at the website New Economic Perspectives.
It may be that Germany has seen the danger of a domino effect of debt reduction and is trying to avoid that.
“At some point, you have to wonder if the costs of a Greek rescue outweigh the costs of a Greek default,” one hedge-fund manager told CNBC (on the condition that he not be named). He said he was short the debt of several European nations, but not Greece.
He speculated that Germany might continue to demand ever more austerity in return for aid, declaring every possible agreement reached in Greece as unsatisfactory. Eventually, the Greek government would find itself unable or unwilling to make further budget cuts.
“In this way, Germany could force a Greek default without ever moving off their public stance supporting a bailout,” the hedge-fund manager said.
So far, all publicly available evidence indicates that Germany continues to support extending aid to Greece. But there is a certain logic to the idea that at least some German policy makers may be increasingly worried about triggering a wave of demands for “private sector involvement” across Europe.
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