Bloomberg News

Merkel Faces Dissent on Greece as Schaeuble Stokes ECB Clash

June 08, 2011

(Updates with Schaeuble estimates in eighth paragraph.)

June 8 (Bloomberg) -- Less than 24 hours after Angela Merkel was urged by President Barack Obama to take the lead in managing Europe’s debt crisis, the German chancellor faces members of her own coalition who say she’s done enough.

Merkel and Finance Minister Wolfgang Schaeuble briefed lawmakers in Berlin today on a second bailout for Greece, outlining a stance at odds with central bankers, French allies and German voters. That’s a circle not easily squared, said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt.

By calling for bondholders to contribute a “substantial” share of the rescue, Schaeuble is “openly clashing” with European Central Bank President Jean-Claude Trichet, Rieger said. “Either Schaeuble softens his calls or the ECB makes further concessions,” he said. “One will have to give in.”

Merkel again faces a balancing act over the debt crisis that has returned to Greece more than a year after it received a 110 billion-euro ($161 billion) bailout. Besides ECB calls, Merkel must take into account voter anger over the aid and opposition from her coalition partner even as investors and fellow leaders urge Germany to step up its response.

Obama, while hosting Merkel at the White House, made it clear he’s looking to policy makers in Europe’s largest economy to prevent an “uncontrolled spiral of default” in countries such as Greece to avoid “disastrous” harm to the U.S. economy.

‘Sensible Resolution’

“We think that America’s economic growth depends on a sensible resolution of this issue,” Obama said at a joint news conference with Merkel in Washington yesterday.

Merkel and Schaeuble spoke to lawmakers on Greece in two separate sessions behind closed doors in parliament in Berlin. Schaeuble said he reckoned Greece’s financing needs total 90 billion euros through 2014, according to two people who attended one of his briefings.

“If the euro as a whole is in danger, it’s in Germany’s interest -- and in every country’s interest -- to help,” Merkel said at the White House. “At that point, we will of course take action, but we will act in a way that’s sustainable.”

Merkel’s coalition trails the opposition Social Democratic Party and Greens by 35 percent to 49 percent, a Forsa poll for Stern magazine showed today. Backing for the anti-nuclear Greens rose 1 point to 27 percent, narrowing the Christian Democrat lead to just 3 points.

Merkel’s Guidelines

Coalition lawmakers are drafting a resolution giving Merkel and Schaeuble guidelines on Greece that will be taken to a non-binding vote June 10. The ruling parties may present separate resolutions on Greece and on the permanent ESM rescue fund depending on the outcome of a progress report by the so- called troika of the International Monetary Fund, the European Commission and ECB, party spokesmen said yesterday.

The votes will send a strong message on lawmakers’ “red line,” Christian Democrat budget spokesman Norbert Barthle said in an interview yesterday. “Whatever the resolution or resolutions otherwise may state, taxpayers’ interests will be stamped clearly into the text,” he said.

Schaeuble, in a June 6 letter to Trichet, John Lipsky, the IMF’s acting chief, and fellow euro finance ministers, said that maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy.

Any agreement on aid at a ministers’ meeting on June 20 “has to include a clear mandate -- given to Greece possibly together with the IMF -- to initiate the process of involving holders of Greek bonds,” Schaeuble wrote in the letter.

Clashing Positions

The German position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area’s first sovereign default. A swap offering investors terms that are “worse” than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said this week.

Euro finance ministers met today in a telephone conference and had their “first exchange of views on the financing modalities” for Greece, according to a statement issued by the group’s chairman, Luxembourg’s Jean-Claude Juncker.

Greek 10-year bonds yield almost 16 percent and the country is the most expensive in the world to insure against default, at a record 1,474 basis points, according to CMA prices. That puts their chance of default within five years at 71 percent.

‘Inevitable’ Restructuring

“What I think is ultimately inevitable is a serious hard restructuring -- a writedown -- of much of the Greek sovereign debt, but we are not there yet politically,” Citigroup Inc. Chief Economist Willem Buiter said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse” today.

In Paris, “the French position is that we are against a restructuring of Greek debt, no matter how it’s formulated,” government spokesman Francois Baroin said today.

Meanwhile, Greek Prime Minister George Papandreou is seeking to damp mounting protests and dissent within his ruling Socialist party to additional deficit cuts and asset sales to whittle down Europe’s biggest debt load.

Greek unemployment rose to 16.2 percent in March, the highest since it joined the euro and up from 12 percent when it got the bailout, the Hellenic Statistical Authority said today. German unemployment was 7 percent in May, the lowest since records for reunified Germany began in 1991.

With a return to capital markets in 2012 “more than unrealistic,” Greece needs more aid to avert “the real risk of the first unorderly default within the euro zone,” Schaeuble wrote. He called for a “a quantified and substantial contribution of bondholders to the support effort.”

Germany “is right to demand participation of the private sector,” Klaus-Peter Flosbach, parliamentary finance spokesman for Merkel’s bloc, said in an interview today. “It’s not acceptable that all the risks should be carried by the public sector. A voluntary extension of maturities by private creditors would be a big help in defusing the situation.”

--With assistance from Tony Czuczka and Mike Dorning in Washington, Jana Randow in Frankfurt and Scott Hamilton in London. Editors: Alan Crawford, Leon Mangasarian

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Rainer Buergin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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