• Germany has toughened its stance towards Greece, as a government spokesman yesterday indicated that Greece should seek financial assistance from the IMF.
  • The Greek prime minister seems to be positioning himself ahead of an EU summit next week by not ruling out the possibility that Greece could indeed seek help from the IMF.
  • Markets have reacted negatively today. EUR/USD is lower and Greek-German government bond spreads have widened.

Yesterday a spokesman for German Chancellor Angela Merkel’s party said that Greece should turn to the IMF if it needs aid. These signals are in contrast to recent comments out of the EU. On several occasions it has been hinted that the EU would prefer to support Greece if needed, without having to involve the IMF directly, but rather rely on the framework that the IMF builds on. On Monday, the Euro Group agreed on the technical arrangements enabling the EU to take swift and co-ordinated action to support Greece if needed. No details have been released about the potential facility.

This morning Greece responded to the toughened German tone as an unidentified Greek official, according to Reuters, said that Athens has very little hope for aid next week from the EU summit on 25 March. He hinted that Greece might seek support from the IMF over the Easter weekend on 2-4 April, and he further added that the Greek prime minister was in steady talks with IMF Strauss-Kahn. The above comments were denied by another unidentified Greek official from the Finance Ministry.

Greece seems to be positioning itself for the EU summit next week. Hence even though Germany yesterday signalled that the IMF should be brought in to help Greece, the general stance within the EU towards letting the IMF support eurozone countries is negative, and Greece knows this. Greek prime minister, George Papandreou, a few hours ago urged the EU to make Athens a clear offer of support at the summit next week – in other words, he wants details about the facility to be made official. He added that he would prefer not to turn to the IMF although he is keeping the options on aid open.
Financial markets have reacted negatively. EUR/USD has been under pressure this morning and Greek-German ten-year spreads widened around 13bp, as Greek bonds sold off. CDS spreads widened too. Going forward, markets are likely to remain highly volatile as the bargaining game continues. Overall we see room for some narrowing of Greek-German spreads in the coming weeks as we think some resolution will be found on the Greek issue. Overall, the comments from Euro Group and ECOFIN are constructive in terms of supporting Greece and comments from the ECB have also been quite supportive for Greece. It is however obvious that Germany has toughened its stance towards Greece – probably due to domestic policies – and Greece has responded by threatening to go to the IMF. Hence, the bargaining game continues. We expect eventually to get details about the facility the EU can offer to Greece – a facility that could involve bilateral support to Greece from EU countries as indicated by Jean-Claude Juncker chairman of the Euro Group. This might involve German KfW buying Greek bonds and possibly also France lending money directly.