Greece's debt woes have Merkel pleading for patience

This post is part of a new series that brings a fresh perspective to global news from our team of foreign correspondents.
With crashing stock markets, a plummeting currency and furious talk of military interventions in the Greek economy, this may be remembered as the Monday when the European crisis turned into an utter cataclysm.

More related to this story

• U.S. stocks get late lift on talk Italy may get Chinese support
• Premarket: Roiled by Greek debt default fears
• Germany moves fast to ease ECB tension 

The decline of London, Berlin and Europe-wide stock indices by at least two per cent each on Monday morning, along with the fall of the euro to a 10-year low against the yen and a seven-month trough against the U.S. dollar, came as no surprise to Europeans who watched the battle between Berlin and Athens over the Greek debt crisis go ballistic over the weekend.
Greece, pushed to the wall by a sequence of German-led bailouts that have done little more than pile on more debt, announced on Monday that it is nearly out of cash. Deputy Finance Minister Filippos Sachinidis said in a TV interview that the country only has funds to last until mid-October.
After that, it will depend on another tranche of bailout funds from the International Monetary Fund – but with its domestic economy sliding sharply backwards as a result of previous bailouts and tax revenues therefore dwindling, Greece is unlikely to meet the IMF’s fiscal conditions.
This has led to desperate measures. On Sunday, Greece announced an emergency property tax of about 50 cents per square foot on all buildings, payable immediately, in an effort to top up government coffers enough to meet bailout conditions.
Senior German officials leaked suggestions to the media that Greece be forced out of the 17-country euro zone and returned to the drachma – a move that would likely do terminal damage to German banks, which hold huge shares of euro-denominated Greek debt, and might send Italy and Spain plummeting into default.
Angela Merkel, the German chancellor, snuffed out any discussion of “Drachmaization” of Greece on Monday, saying that any country leaving the euro zone would trigger a catastrophic domino effect. But she said she agreed with economy minister Philipp Rösler, who said on Sunday that the stabilization of the euro might require “if necessary, an orderly bankruptcy of Greece.”
Other German officials stirred up markets and raised long-simmering animosities to a boil by making far more radical, even militaristic, suggestions.
Günther Oettinger, Germany’s representative on the European Commission, said last week that Europe should send United Nations soldiers to Greece to liquidate its assets and force tax collection, according to the Daily Telegraph. This resulted in headlines in Greece denouncing the “Fourth Reich” and “terrorism against the Greeks.”
The core problem is that efforts to keep Greece solvent, by extending further low-interest emergency credit in exchange for austerity measures, have choked off the Greek economy far more dramatically than European Central Bank and IMF officials expected.
The Greek economy is now projected to contract by a staggering 5.3 per cent this year, rather than the 3.8 per cent estimate upon which the IMF and EU bailout plans were based.
German voters have become hostile to the idea of a full-scale rescue of Greece’s economy, rather than a mere debt bailout, and as a result Ms. Merkel has retreated from the sort of large-scale ideas that would be required to keep the currency union aloft. She has failed to agree with French President Nicolas Sarkozy on a major long-term plan, which would almost certainly have to involve making euro zone debt and fiscal instruments centralized, and likely stimulating the Greek economy.
In an interview with Der Tagesspiegel newspaper Monday, Ms. Merkel appeared to be trying to defuse the crisis by suggesting that any talk of Greece withdrawing from the euro or Germany withdrawing its aid to Greece should be put aside. “What was ignored for ten years can’t be fixed overnight,” she said. “That means that we have to be patient.”

More related to this story

• World at risk of second financial heart attack
• Stocks tumble on worries about Europe
• G7 leaders scramble to reassure amid Greece worries
• ECB’s Stark exiting after bond-buying row
• The mood in Europe is growing more sour by the day