Bloomberg News

Greece Vote Turns Spotlight Back on German-ECB ‘Cage Match’

June 22, 2011

(Adds comments by Merkel in ninth paragraph.)

June 22 (Bloomberg) -- The Greek Parliament’s vote of confidence in Prime Minister George Papandreou shifts the spotlight back to Germany and the European Central Bank as key to Greece’s quest for further international financial aid.

Lawmakers in Athens supported Papandreou in a 155-143 vote after the prime minister shuffled his Cabinet and sought the chamber’s approval. The vote may bolster Greece’s chances of securing a 12 billion-euro ($17 billion) loan payment, which hinges on support from European leaders and on Greece’s ability to push through 78 billion euros in additional budget cuts next week.

“The question that’s still lingering is the old cage match between the ECB and Germany, and who’s going to give and who’s going to blink, and how much,” said Ilan Solot, currency strategist at Brown Brothers Harriman in London.

The Frankfurt-based central bank and German Chancellor Angela Merkel’s government have clashed over the role of private creditors in the Greek rescue, with the ECB resisting Germany’s calls to require investor participation.

European leaders will discuss Greece’s needs at a two-day summit in Brussels starting tomorrow and finance chiefs will decide on July 3 whether Greece has met conditions for the next aid payment. Investors are watching to see if the ministers will clear the payment, which is contingent the Greek Parliament approving the extra budget cuts, or prolong the uncertainty in a bid to increase pressure on the lawmakers.

‘Difficult Situation’

The confidence vote “removes an element of uncertainty from an already very difficult situation” and allows Greece to focus its attention on the austerity measures, European Commission President Jose Barroso said in a statement. If Parliament approves the budget cuts, it will clear the way for “rapid disbursement” of the aid payment, he said.

Germany and the ECB continue to spar over the role of bondholders in the Greek rescue. German officials including Merkel and Finance Minister Wolfgang Schaeuble are calling for more certainty over private-sector participation, even as they have backed down from demands to mandate investor losses.

The central bank led by President Jean-Claude Trichet has maintained that any participation by private investors in a new aid package for Greece must be voluntary. Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said on June 20 that holders of Greek bonds must not be pressured to roll over their debt.

Bondholder Contribution

A bondholder contribution was “always meant to be voluntary,” Merkel told a German Parliament committee today in Berlin. She said no solution is possible without the support of the ECB, which warned that a compulsory role risked triggering Greek default and contagion.

If European leaders reach a deal on aid for Greece, “that would be great for the markets,” Brown Brothers’ Solot said. “It might serve as the carrot instead of the stick for the government to pass this proposal.”

Other analysts warned that European heads of state and government have strong incentives to stand back until Greece has shown it will move forward with spending cuts.

“The austerity that is required in Greece is just enormous,” said Guntram Wolff of the Brussels-based Bruegel Institute. “They do want to put a lot of pressure on Greece. It’s quite possible they may wait another week.”

Additional Support

Outside Europe, policy makers have criticized the uncertainty over whether and how additional support for Greece will be provided. The International Monetary Fund, contributor of one-third of the bailout money for Greece and the two other euro-area countries that have received rescue packages, has warned EU leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.”

U.S. Treasury Secretary Timothy F. Geithner yesterday called for Europe to speak with a “clearer, more unified voice” on its strategy. The public disagreements make it hard for global investors to understand Europe’s plan, he warned.

--With assistance from Tony Czuczka and Rainer Buergin in Berlin and Maria Petrakis in Athens. Editors: Jones Hayden, Jennifer Freedman

To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net

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


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