Merkel Lessens Fears Over Greece

The Wall Street Journal

German Leader Rejects Suggestions Athens Be Allowed to Default or Leave Currency Bloc, Reassuring Nervous Market

By MARCUS WALKER and NOÉMIE BISSERBE

BERLIN—German Chancellor Angela Merkel rejected suggestions that Greece could be forced into bankruptcy soon or even leave the euro zone, lifting European banking shares and broader financial markets that have been gripped in recent days by fears of an imminent Greek meltdown.

The German leader called German politicians, including her own economics minister, to heel for suggesting in recent days that Greece should be allowed to go bust. Those remarks fanned fears that Germany would accept, and possibly even support, evicting Greece from the euro zone, fuelling a market sell off.

"I think we will do Greece the biggest favour by not speculating much, but instead encouraging Greece to implement the commitments it has made," Ms. Merkel told a German radio station. "What we don't need is unrest in the financial markets—the uncertainties are already big enough," she said.

The political sparring in Berlin reflects the difficulty Europe faces in reaching a consensus on how to manage the region's deepening debt crisis, both domestically and within the framework of the European Union.

Ms. Merkel, leader of Europe's biggest nation and the key player in managing the crisis, stressed that Germany remains committed to financing Greece through the euro zone's bailout funds until Greece can repair its own finances through austerity measures.

Greece has been engaged in a standoff with the International Monetary Fund and the EU over its next tranche of emergency aid. Investors worry that Greece won't fulfill the necessary requirements for further rescue funds and will run out of money, forcing it to default on its debts.

Ms. Merkel, however, expressed confidence that Greece would redouble its efforts to qualify for its next slice of international aid. Later on Tuesday, after a meeting with Finnish Premier Jyrki Katainen, Ms. Merkel told reporters that all actions taken in the euro zone must be "controlled and the consequences known." Berlin officials say that wouldn't be the case with a Greek debt default.

Her comments helped to reassure financial markets panicked by recent rumors of an imminent Greek default and possible euro exit. The euro, down sharply in recent days, rose to $1.37. But the biggest beneficiaries were French banks, whose stocks rose strongly on Tuesday.

The reprieve for French bank stocks follows a deep selloff in recent weeks, prompted by the perception that a chaotic Greek bankruptcy could inflict losses on banks in France and elsewhere that are heavily exposed to Greece's economy.

Officials in France and Germany said the two countries' leaders, Ms. Merkel and French President Nicolas Sarkozy, would hold a conference call on Wednesday with Greek Prime Minister George Papandreou. The leaders are expected to press Mr. Papandreou to narrow Greece's budget deficit, despite the growing public backlash in Greece against austerity measures that are blamed for causing a worsening economic slump.

Greece's economy is expected to contract by more than 5% this year, while unemployment has topped 16%. Greece's growing economic and political strains, combined with persistent failure to hit budget targets set by Europe and the International Monetary Fund, are raising doubts about whether the country can keep up its present course.

Economists say the alternatives for Greece aren't too attractive, however. Defaulting on Greek government debt could lead to a larger financial crisis in Europe as funding for banks and other euro-zone governments dried up.

Many euro-zone policy makers fear a Greek default would create bigger, not smaller, costs for European taxpayers than continuing with the bailout program, since Germany and other solvent countries would have to prop up the euro's weaker members and their banks. A Greek exit from the euro zone could cause an even bigger conflagration, since markets would ask which country was next, economists say.

But bailouts are causing growing political strains both in Greece and in Northern Europe, including Germany, where many voters resent having to finance profligate Mediterranean countries.

Some politicians in Ms. Merkel's governing coalition are seizing on the issue to shore up their popularity, calling the continued aid for Greece into question.

German Economics Minister and Deputy Chancellor Philipp Rösler wrote in a newspaper column published Monday that Europe might have to put Greece through some sort of insolvency procedure in order the stabilize the euro. "There should be no taboos," his article in German newspaper Die Welt said.

Mr. Rösler is also the leader of the Free Democratic Party, the junior partner in Ms. Merkel's conservative-led government. The FDP, which is reeling from a series of electoral defeats and plunging opinion-poll ratings, has seized on the unpopularity of taxpayer bailouts of Greece as a way to win back voters, political analysts said.

The party is fighting to avoid another heavy defeat in elections to Berlin's state legislature on Sunday, and has focused its Berlin campaign on the euro-zone debt crisis, with posters attacking proposals for common European bonds.

The FDP leader repeated his comments on Tuesday, saying voters expect "honest answers."

Another German coalition member, Bavarian conservative leader Horst Seehofer, went further than Mr. Rösler over the weekend, saying Europe should consider throwing Greece out of the euro zone.

Ms. Merkel's Christian Democrats, the largest party in the government, rejected the idea, with the chancellor warning that a Greek exit could lead to a disastrous domino effect, with financial markets speculating against other countries' ability to remain in the euro.

In her radio interview, Ms. Merkel sought to calm fears that Europe's strategy for handling the Greek crisis is falling apart. She expressed optimism that Greece's fiscal efforts would satisfy the inspectors from the European Union and International Monetary Fund this month, allowing Greece's next aid payment to go ahead.

"Everything I hear from Greece is that the Greek government has hopefully understood the signs of the times and…has started doing some things that need to be done," she said.

—Charles Forelle and Noémie Bisserbe contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com