Germany, EU urge calm as Greek default talk roils markets

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German and European Union officials scrambled to calm jittery markets on Monday, as talk in Berlin of a Greek default fuelled fears the debt crisis was deepening, sending the euro sharply lower.

The single currency fell to a 10-year low against the Japanese yen and German bond yields tumbled as traders sought a safe haven after senior German policymakers raised the spectre of an ignominious eurozone exit for Greece.

Markets were already volatile following the shock resignation of the chief economist at the European Central Bank, Juergen Stark, after the German reportedly disagreed with the ECB's policies to fight the debt crisis.

And analysts feared that a sharper tone from Berlin indicated that Europe's paymaster was losing patience with Athens and its deficit problems.

German Economy Minister Philipp Roesler, who is also vice chancellor, set nerves jangling when he wrote in an opinion article for the conservative daily Die Welt that Europe could no longer rule out an "orderly default" for Greece.

Other senior politicians, including close allies of Chancellor Angela Merkel, suggested that Greece could be forced out of the euro, prompting a swift response from Merkel's spokesman at a regular government news conference.

"Our goal is quite clear: We want to stabilise the eurozone as a whole," Steffen Seibert told reporters.

At the same press conference, Roesler's spokesman stressed: "Our common goal is the stability of the euro and we want Greece to stay in the euro."

Meanwhile, a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn also insisted that Brussels was not considering a scenario in which Greece defaults on its debts.

"I'm saying this pretty well every two or three days. No, we are not working on such a hypothesis," Amadeu Altafaj told a daily EU briefing in Brussels.

Der Spiegel news weekly had earlier reported that German finance ministry officials were working on two scenarios should Greece go bankrupt: one where it stays in the euro, the other where it reintroduces the drachma.

The president of Germany's influential Ifo institute suggested that Athens should do precisely that.

A Greek default "would not be the end of the world but a liberation for the country," Hans-Werner Sinn told reporters.

He said Greece needed to devalue its currency by 20 or 30 percent. "To do this, they need to leave the eurozone. It would be the least bad scenario."

After meeting in Berlin, EU Commission President Jose Manuel Barroso and Merkel called on eurozone countries to implement measures already agreed by EU leaders to boost the bloc's rescue fund (EFSF) amid foot-dragging in Slovakia.

The pair "reasserted that the approval procedures for the expanded EFSF should be completed by the end of September," a German government statement said, in comments later echoed by French Finance Minister Francois Baroin.

Slovakia has said it would delay its vote on the expanded package as a eurosceptic junior member of the four-way coalition in Bratislava fights against it.

Merkel's spokesman Seibert stressed that Athens had to fulfil strict conditions before receiving its next tranche of bailout money from the EU's rescue fund.

"Our line on Greece is clear: We will help, but only under strict conditions," said Seibert. If Greece does not live up to its commitments, "then the next tranche cannot be paid. That is quasi-automatic," he said.

Holger Schmieding, an analyst at Berenberg Bank, warned of the chaos that that would cause.

"A German 'no' to further support for Greece is a serious risk, although it is not the most likely scenario yet," he said.

However, if this were to happen, "it could weigh on financial markets, depress business and consumer sentiment and exacerbate the near-term downside risks to the German and overall eurozone economy."

© 2011 AFP

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