Bloomberg News

Schaeuble Defies ECB to Insist Bondholders Share Greek Aid

June 10, 2011

(Adds Bundestag backing for Greek aid motion in second, 14th, 15th paragraphs, updates bonds, euro in fifth.)

June 10 (Bloomberg) -- German Finance Minister Wolfgang Schaeuble stepped up his calls for bondholders to assume a “fair” share of further Greek aid, setting Europe’s biggest economy on a collision course with the European Central Bank.

In a speech to parliament in Berlin evoking the spirit of German unity and European integration, Schaeuble appealed to lawmakers to back a second bailout for Greece to ensure a stable euro and bolster the global economy. In return, “we have to insist on the participation of the private sector,” he said. Lawmakers later backed a nonbinding motion allowing Greek aid.

“I have proposed a fair distribution of risks between tax payers and private creditors for the phase of gaining time,” Schaeuble said in his speech to the lower house today. “We pointed out as early as last year that in the future mechanism for the solution of debt crises in euro states a participation of private creditors in cases of insolvency is indispensable.”

Chancellor Angela Merkel’s government is refusing to back down in the face of an escalating clash with ECB President Jean- Claude Trichet, who rejected any direct ECB participation in a second Greek bailout yesterday. Euro governments are scrambling to forge a plan by a June 24 European Union summit to avert Greece becoming the currency area’s first sovereign default.

Greek, Irish and Spanish benchmark bonds slumped after Schaeuble’s speech. Portugal’s 10-year bond yield rose 16 basis points to a record 10.45 percent at 10:01 a.m. in London, while Greece’s 10-year yield rose 11 basis points to 16.77 percent. The euro declined 0.37 percent to $1.4474.

Default Warning

Credit analysts at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have indicated in the past week that pressure on private investors to participate under the threat of a Greek bankruptcy would prompt a default rating on Greek debt.

Euro-area finance ministers agreed on a conference call this week to establish a working group with the International Monetary Fund, the ECB and the European Commission “to sound out the thin line between a meaningful involvement of the private sector and the avoidance of negative financial market reaction,” Schaeuble said.

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

‘Clear Mandate’

Any agreement on aid at a June 20 finance ministers’ meeting “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.

Trichet warned against that approach yesterday, saying any solution forcing private-sector involvement amounts to a “credit event” and would be an “enormous mistake” for the euro region.

“We’re taking skeptical voices and warnings from the European Central Bank on the involvement of the private sector seriously,” Schaeuble said. The working group set up this week is charged with “finding a good solution for the involvement of the private sector that can and has to be supported by the European Central Bank.”

Schaeuble acknowledged the need to win over the German public to more aid for Greece, saying that Germany’s export- dependent economy is “drawing the biggest advantage” from the euro, bringing with it responsibility for Europe and the world.

Berlin Wall

Evoking the building of the Berlin Wall 50 years ago in August and reunification of East and West Germany in 1990, Schaeuble said that bolstering European integration “is the best guarantee we can deliver” for the future. “We have a responsibility to Europe to show leadership,” he said.

Lawmakers voted in favor of a nonbinding motion from the ruling parties to allow Greek aid. Eight conditions were specified that are intended to guide Merkel as she negotiates with her European counterparts.

The German parliament demands that the government “only agrees to new financial help for Greece if there is an adequate participation of private creditors,” the motion said. It calls for parliament to be consulted on any future aid and urges added pressure on Greece to sell assets, boost economic growth, cut spending further and subject its economy to regular scrutiny.

The motion won’t hinder international efforts to agree on a second aid package, Merkel’s chief spokesman, Steffen Seibert, told reporters after the vote. Merkel’s government “feels supported in the task to go to European institutions and fight for what the motion says,” he said.

--With assistance from Brian Parkin in Berlin. Editors: Alan Crawford, Andrew Davis

To contact the reporters on this story: Rainer Buergin at rbuergin1@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net

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


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