True Love?

In yesterday’s first joint television interview, Angela Merkel and Nicolas Sarkozy demonstrated the close German-French relationship but did not reveal any news on Greece.

German Chancellor Merkel and French president Sarkozy held a joint interview for both the French and German television. The main intention of this media event was obvious: a demonstration of the close German-French relationship, showing that the two biggest Eurozone countries were standing shoulder to shoulder to save the Eurozone. Sarkozy and Merkel did not repeat their earlier call for a special European bank account for all Greek government revenues.

The joint interview did not change the facts. There is still no news on the second Greek bail-out package. Greece still needs around €15bn in March and the Troika can only pay the next tranche of the first bail-out loan if long-term sustainability is guaranteed; a condition set by the IMF. To get this long-term sustainability, Eurozone leaders already agreed in October on a second bail-out package of €130bn, under the condition of a private sector contribution of €100bn. To prevent Greece from defaulting in March, there will have to be an agreement on the private sector involvement, more structural reforms and austerity measures from the Greek government to fulfill the Troika’s bail-out programme and additional debt restructuring from the public sector (as the latest estimates show that a bail-out package of €130bn might not be sufficient).

All negotiations will continue and all involved are playing hardball, again contemplating the possibility of a Greek default or even Greece leaving the Eurozone. Despite the current excitement and uncertainties, our baseline scenario remains that there will be an agreement on a second bail-out package for Greece. It may not necessarily be this week, as we still remember the experience of October and November last year when very strict deadlines also became rather flexible, extending the negotiation process much longer than expected.

A disorderly default would be counterproductive for the recent Spanish and Italian efforts and would probably completely reverse latest confidence gains in markets. Therefore, ring-fencing Greece at (almost) any costs to buy time for the other peripheral countries should remain the main strategy of Eurozone’s power couple. After some dissonances during the first stage of the debt crisis, the French-German cooperation could almost be labeled as true love. Let’s hope it does not end like a famous song by the British band Joy Division: “love will tear us apart, again”.