Athens Mulls Plans for New Currency: Greece Considers Exit from Euro Zone

05/06/2011



Athens Mulls Plans for New Currency

Greece Considers Exit from Euro Zone

By Christian Reiermann


REUTERS

A protest against austerity measures in Athens. Greece is considering leaving the euro zone, according to sources in the German government.

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.


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Graphic: Liabilities of the Euro-Zone States

Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Banks at Risk

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.

In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."

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Graphic: Unaffordable


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Graphic: Bailed Out


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Graphic: European Central Bank in Figures


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Graphic: Debts Relative to Economic Output

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Greek PM denies country will leave euro

By Dina Kyriakidou and Renee Maltezou Dina Kyriakidou And Renee Maltezou – Sat May 7, 8:04 am ET

ATHENS (Reuters) – Greek Prime Minister George Papandreou on Saturday denied there was even unofficial discussion over Greece quitting the euro zone and asked that his troubled country be "left alone to finish its task."

Ministers from the euro zone's biggest economies met in Luxembourg to discuss Greece's debt crisis on Friday but Athens and senior EU officials denied a report by Germany's Spiegel Online that the Greek government had raised the prospect of leaving the 17-member euro zone.

"These scenarios are borderline criminal," Papandreou told a conference on the Ionian island of Meganisi. "No such scenario has been discussed even in our unofficial contacts...I call upon everyone in Greece and abroad, and especially in the EU, to leave Greece alone to do its job in peace."

European Central bank Governing Council member Erkki Liikanen on Saturday shot down reports of Greece exiting the euro and said restructuring its 327 billion euro ($470 billion) debt would offer no permanent solution to its problems.

"No euro zone country wants to leave the euro," Liikanen, who also heads the Bank of Finland, said in an interview at Finnish national broadcaster Yle.

Jean-Claude Juncker, head of the group of euro zone finance ministers who called the late Friday meeting, said there was a broad discussion of Greece and other international economic issues but said the idea of exiting the euro was stupid.

"We have not been discussing the exit of Greece from the euro area. This is a stupid idea. It is in no way -- it is an avenue we would never take," he told reporters after the meeting attended by ministers from Germany, France, Italy and Spain.

"We don't want to have the euro area exploding without reason. We were excluding the restructuring option, which is discussed heavily in certain quarters of the financial markets," he added.

But he said a meeting of all euro zone finance ministers on May 16 would discuss whether Greece needed a further economic plan. The EU is currently negotiating a bailout with Portugal, the third state it is rescuing after Greece and Ireland.

Despite a 110 billion euro international bailout, Greece, a euro zone member since 2001, has not cut its budget deficit as fast as it promised its lenders amid a deep recession. Gains from spending cuts and tax hikes have been partly erased by low revenues due to tax evasion and a deep recession.

Financial markets have been skeptical for months that Athens could manage its huge debt without eventually restructuring. As austerity bites, even some ruling socialist party politicians have been suggesting a "soft" restructuring which might involve lengthening maturities on the country's bonds.

On Friday, the euro fell nearly 1 percent against the dollar and the cost of insuring Greek debt against default was quoted at a record high in response to the Spiegel report.

Greek Finance Minister George Papaconstantinou attended the Luxembourg talks, his finance ministry said. It added that Greece remained committed to repairing its finances and returning to economic growth.

Asked by Italy's La Stampa newspaper if it would be easier to leave the euro, the minister said on Saturday: "No, it's impossible. Above all, because the mechanism does not exist to leave the euro."

The Luxembourg talks were also attended by European Central Bank President Jean-Claude Trichet and Olli Rehn, the European commissioner for economic and monetary affairs.

(Additional reporting by Sakari Suoninen and Paul Carrel in Helsinki, Ian Simpson in Milan; Writing by Dina Kyriakidou; editing by Keiron Henderson)


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