German economists predict higher risk of Grexit following referendum

Government default seems unavoidable in Greece. [piet theisohn/Flickr]

After the “No” vote in Greece, German economists are saying “it boils down to a Grexit”, predicting the country is on its way out of the eurozone. EURACTIV Germany reports.

The German government takes note of the Greek people’s vote and respects it, said government spokesman Steffen Seibert on Monday (6 July) in Berlin.

But according to the German Finance Ministry, a debt haircut is not on the table. The German position has not changed at all, said ministry spokesman Martin Jäger. He indicated that, under the existing European Security Mechanism (ESM), a multilevel procedure for a new assistance programme is necessary. This would have to come with approval from the plenum of the German Bundestag,

Meanwhile, the German economy reacted with concern after Greeks rejected reform plans from international creditors in Sunday’s referendum.

“The result is a slap in the face for all Europeans,” said President of the Federation of German Industries (BDI) Ulrich Grillo speaking to Bild on Monday.

“With the referendum, the Greek population unfortunately chose the supposedly easier solution,” said Michael Kemmer, general manager of the Association of German Banks.

Leading German economists indicated growing probability of a Grexit. “The referendum translates to a political and economic catastrophe for Greece,” President of the German Institute for Economic Research Marcel Fratzscher wrote in his blog.

“Once again, the Greek government has made promises to its citizens that it will not be able to keep. Greece’s economy will sink into an even deeper depression in the coming months. Unemployment will continue to rise and social upheavals will intensify,” the economist said.

Fratzscher explained that chances for an agreement over a new assistance programme have become considerably worse since the referendum. “I expect a complete breakdown of the Greek banking system in the coming weeks because the ECB will not be able to maintain its emergency assistance. I foresee the introduction of state debt bills – a parallel currency to the euro. A Grexit is and remains the worst option for Greece. It is becoming more and more likely.”

Drachma as a virtual currency

According to Ifo Institute President Hans-Werner Sinn, Greece should take the leap and reintroduce its own currency.

“The drachma should be introduced immediately as a virtual currency,” he said in Munich.

“All of the country’s contracts, including the debt contracts with foreigners, should be converted. That would make the Greek state and Greek banks liquid again,” Sinn said.

At the same time, the community of states should forego collecting the euro banknotes that Greek citizens hold but, rather, allow them to be used for cash transactions although prices would be defined in drachmas, Sinn argued.

“The Greek state is bankrupt, according to the official assessment of the EFSF rescue mechanism and because it is insolvent, this also applies to the numerous banks with which it is connected,” the Ifo chief pointed out. In this situation, the ECB should no longer approve further emergency loans to the Greek Central Bank, he warned.

“This would most certainly bring the economy to a standstill if a new fiscal rescue mechanism is not promptly assembled or Greece does not reinstate the drachma. Because it is conceivable that the negotiations over a further rescue mechanism will only take more time without resulting in success, Greece should introduce a new currency,” Sinn added.

“Greek banks threaten to bleed to death”

After Athens failed to repay its debt to the International Monetary Fund (IMF) a few days ago and no new bailout money is coming its way, a government default seems hardly avoidable.

“On 20 July, the government bonds held by the ECB may not be paid back as negotiated,” predicted Jörg Krämer, a chief economist at Commerzbank. “Then the ECB would not be able to raise the upper limit on ELA emergency loans, in which case Greek banks would threaten to bleed to death.”

In addition, it will be difficult for the government to manage the next wage and pension payments, Krämer said. “In a situation like this, the government has hardly any other option than to introduce a new currency to regain solvency,” he explained.

>>Read: ?Eurogroup on Greek crisis breaks up after 90 minutes

“It boils down to a Grexit,” said Jürgen Michels, a chief economist at BayernLB, speaking to Reuters. “The Eurogroup will surely not deny itself negotiations. The question will be: What do the Greeks want to get out of it? How big should the desired debt haircut be, for example? Tsipras will go into the negotiations with his chest puffed out. The Eurogroup has the choice. Either it loses face and gives up, or risks a Grexit and moves into unknown territory.”

Last-minute compromise hardly doable any longer

Meanwhile, Holger Schmieding, chief economist from the Berenberg Bank, said that a last-minute compromise is hardly achievable at this point.

“The government has paralysed the economy to such an extent that Greece’s financial need keeps increasing from week to week,” he explained. “That makes it very, very difficult for creditors to offer something that could suffice.”

“The next few weeks will be characterised by high insecurity for Greece. It is hardly possible to make reliable predictions,” said economics analyst Nicolaus Heinen from Deutsche Bank.

“It is conceivable that the economic situation in Greece will continue to come to a head, to the extent that the atmosphere collapses and Alexis Tsipras’ government is put under pressure.” Under a new government with leadership from the civil camp negotiations could take place over a further bailout package, he said.

“If Tsipras stays in power,” Heinen predicted, “speculations over an imminent insolvency and a parallel Greek currency will increase in the weeks to come.”

The anti-austerity party Syriza won an overwhelming victory in the Greek elections on January 25, but failed to obtain an absolute parliamentary majority.

The party leader Alexis Tsipras provoked mixed reactions among his EU counterparts, announcing that the "vicious cycle of austerity is over".

Reforms offered by Athens have failed to convince the Eurogroup and the country's creditors, and Greece now finds itself unable to pay its debts and in a more precarious situation than ever.

The proposals were a bid to unlock the final €7.2 billion tranche of its international bailout, which creditors have refused to release unless Greece agrees to more austerity measures. Greek Prime Minister Tsipras was elected promising to end five years of austerity.

Without the bailout cash Greece will be unable to meet a €1.5 billion International Monetary Fund (IMF) payment on Wednesday (30 June), and a default could send Athens crashing out of the single currency and possibly the EU.

>>Read: LIVE: Greece edging towards default?

ifo Institute (German language): ifo-President Sinn advises Greece to reintroduce the drachma

German government (German language): Seibert: No basis for a new assistance programme

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