After the Elections: Centre for European Economic Research Calls for a Greece Stress Test

After the election victory of Syriza, Europe should prepare for a Greek payment default. The eurozone must send signals for the coming negotiations that it is not susceptible to blackmail should Greece threaten with a payment stop. This is the result of an analysis concerning the changed post-election situation in Greece by Clemens Fuest, President of the Centre for European Economic Research, and Friedrich Heinemann, head of the Public Finance Department at ZEW.

According to Fuest and Heinemann, any new government in Athens that respects the agreements negotiated with the European partners deserves a continuation of the aid programme for Greece. But against the backdrop of election winner Syriza’s announcements during their campaign, Europe immediately needs to take precautions against the possibility of a Greek default. Until today, however, Europe has been suggesting that a Greek payment stop should be avoided at any price. Concerns still persist about the threat that the default of Greek government bonds would pose for a couple of banks. Furthermore, the governments of the euro countries are reluctant to accept that they would have to write-off their credits for Greece at the expense of tax payers. The new Greek government could play on these concerns with the goal of abandoning the reform path and enforcing further financial help. For this reason Europe should clearly signal that it is not susceptible to blackmail:

First, the European supervision of banks should prepare a "Greece stress test" simulating the default of Greek government bonds and the bankruptcy of Greek banks. Banks in the rest of the eurozone that are affected by this scenario must close their capital gaps.

Second, the other euro area countries should be prepared for the default of credits given to Greece. The European Commission should send a signal that a one-time increase of budgetary deficits because of such losses will be tolerated by the European debt supervision.

Third, the European Stability Mechanism must freeze further payments until the new Greek government has been constituted and has decided which direction it will take.

"These measures do not aim at discriminating Greece or forcing its exit from the eurozone. To the contrary, we want Greece to remain in the European Monetary Union," says ZEW President Clemens Fuest. Future facilitations for Greece should not be ultimately excluded. "But such facilitations demand a mutual understanding concerning the future strategy and can only be granted after, not before, all reforms negotiated with the troika have been implemented."

For further information please contact

Prof. Dr. Clemens Fuest, Tel.: (+49) 621/1235-100, E-mail: fuest@zew.de

PD Dr. Friedrich Heinemann, Tel.: (+49) 621/1235-149, E-mail heinemann@zew.de