Geithner Says Grexit Was Planned

Former U.S. Treasury Secretary Timothy Geithner says in his book Stress Test that Germany thought of kicking Greece out of the Eurozone in 2012.

Former U.S. Treasury Secretary Timothy Geithner says in his book Stress Test that Germany, the biggest contributor to international bailouts propping up Greece, was ready to back kicking the country out of the Eurozone in 2012 to prevent the country’s crisis from bringing down the financial bloc.

Geithner said he met with German Finance Minister Wolfgang Schaeuble, a hardliner who insisted on harsh austerity measures in Greece in return for 240 billion euros ($330.7 billion) in two bailouts from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB).

That took place on the resort island of Sylt after a previous Greek government had stiffed investors with 74 percent losses to write down its debt by some 98 billion euros ($134 billion), an effort the failed to slow the crisis.

The meeting came after Prime Minister Antonis Samaras was just elected in a second ballot but had to form a tense coalition to have a parliamentary majority.

Geithner wrote that, “Schauble was engaging, but I left feeling more worried than ever.” He wrote that after meeting Schaeuble he felt that, “There were many in Europe who still thought kicking the Greeks out of the Eurozone was a plausible – even desirable- strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the Eurozone needed.”

It was a matter of public opinion: The German people “would no longer perceive aid to Europe as a bailout for the Greeks.” At the same time, “a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty.”

The German public widely opposed helping Greece but Chancellor Angela Merkel, whose country would make big profits off its loans, supported the aid but demanded big pay cuts, tax hikes and slashed pensions in return.

Still, there were many, Geithner wrote, who felt Greece was a lost cause and should be cut loose to prevent a contagion that could bring down the Eurozone and the euro itself, and even create political instability across the region.

“The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. I found the argument terrifying,” he writes.

Letting Greece go could create “a spectacular crisis of confidence.” The flight from Europe “might be impossible to reverse,” he added. He said it wasn’t clear to him either “why a German electorate would feel much better about rescuing Spain or Portugal or anyone else.”

He also said the enmity toward Greece ran deep even before that. At a G-7 summit in 2010 at the Canadian outpost of Iqaluit, just south of the Arctic Circle, he said there was wide mistrust of Greece and the government.

The market report showed European markets in turmoil because of Greece and the dinner talk was stark. “The Europeans spent most of the meal complaining about Greek profligacy and mendacity. There were strident calls for austerity and Old Testament justice, determined vows to avoid moral hazard, confident assertions that the crisis could be contained to Greece,” he writes.

He warned the Europeans that “if they were planning to keep their boots on Greece’s neck,” they also needed to assure the markets they wouldn’t allow defaults by sovereign countries. “Just don’t overdo it. If you don’t take out the risk of catastrophic failure, you have no chance of solving this,” he said. Still, Geithner realized that his position was compromised, as the Europeans didn’t want lectures from the US.

“They surely thought of me as the walking embodiment of moral hazard,” he writes, as Germany and France “still blamed our Wild West financial system for the meltdown of 2008. They weren’t going to be swayed by suggestions from the reckless Americans that they should take it easy on the reckless Greeks.”