Angela Merkel Begins To Walk Away From Greece

Angela Merkel, Germany’s Chancellor, is about to walk away from offering aid to Greece. That will almost certainly lead to Greece’s default on its sovereign obligations. Greece does not have the capital to last a month without financial support from the Eurozone nations and IMF.

Germany’s population is strongly against any contribution of aid to Greece. Recent polls show that about 70% of the country’s adults object to the bailout. And Merkel must keep an eye on her political future. Most estimates put the necessary German committment to the bailout at $20 billion.

The IMF/Eurozone bailout would contribute about $50 billion help Greece stave off default. One of the troubles with the plan is that Greece has total national debt of over $400 billion. Greece would be forced to pay exorbitant interest on any debt it tries to raise alone in the global capital markets. That, in turn, would mean the country’s debt service would add substantially to it deficit.

One of the aspects of the IMF/Eurozone program would include a 5% cap on the interest Greece would pay on the new capital. Germany and the other Eurozone nations would be effectively subsidizing the interest rate with their guarantees

According to the AP, Merkel said Germany would not commit to any sum for its contribution to Greek aid until negotiations between Greece and the IMF are over. The press agency reported:

Merkel underlined that any assistance would be tied to “very strict conditions,” including a viable savings plan drawn up in talks between Greece and the IMF and the approval of the European Commission, the European Central Bank, and the IMF.

Her public posturing about the IMF negotiation and the conditions under which Germany would provide part of the aid package give Merkel a number of points on which she can walk away. And, she only needs one.

Douglas A. McIntyre