Merkel victory sets stage for next crisis resolution

Top Stories

Merkel victory sets stage for next crisis resolution

BERLIN — German lawmakers’ approval of an expansion of the euro-area rescue fund’s firepower handed Chancellor Angela Merkel a victory that paves the way for additional steps to stem the European debt crisis.

By (Reuters)

  • Follow us on
  • google-news
  • whatsapp
  • telegram

Published: Fri 30 Sep 2011, 11:52 PM

Last updated: Tue 7 Apr 2015, 5:59 AM

The next moves may include leveraging the €440 billion ($599 billion) European Financial Stability Facility, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co in London. In addition, there may be “an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalisation of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support” for Greece, he said.

The lower house of parliament passed the measure with 523 votes in favor and 85 against, granting the EFSF powers to buy bonds in secondary markets, enable bank recapitalisations and offer precautionary credit lines. It raises Germany’s guarantees to €211 billion from €123 billion.

The bill’s passage by Europe’s biggest economy allows euro-area officials to weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks.

The euro rose 0.6 percent to $1.3620 at 2:20 p.m. Frankfurt time after rising to $1.3679 earlier in the day in anticipation of the German vote. The Stoxx Europe 600 Index, which is heading for its worst quarter since 2008, fell 0.1 percent at 227.23. France, which ratified the EFSF expansion this month, hailed the German vote. The European Commission said the expanded rescue fund is set to be in place by mid-October.

Additional measures now in play include further leveraging the EFSF; bringing forward the start of its permanent successor by a year or more; reopening the second Greek rescue agreed in July to increase the financial industry’s contribution; and a safety net for Europe’s banks if default becomes inevitable. Merkel’s alliance of Christian Democrats and Free Democrats mustered enough votes to pass the changes on the strength of her ruling majority. That meant she didn’t depend on the opposition Social Democrats and Greens, both of which also backed the bill.

EU, IMF talks disrupted

Meanwhile, Greek civil servants blocked the doors of government ministries on Thursday disrupting the start of talks with the EU and IMF on an aid tranche Athens needs to avoid bankruptcy. The government announced unpopular pension cuts, lay-offs and taxes last week to lure back the EU, IMF and ECB inspectors, who left Greece earlier this month over disagreements on the steps needed to plug fiscal gaps.

Before returning and resuming talks on Thursday, the EU/IMF mission demanded written assurances from Greece that the new pledges will be met, highlighting a lack of trust after repeated failures to meet fiscal targets and foot-dragging about privatisations. Prime Minister George Papandreou urged his cabinet ministers on Thursday to step up efforts to meet EU/IMF targets. “We are moving as fast as we can to finish pending issues and you should not allow issues in your area to linger,” he told ministers. But in a further sign of the difficulty to implement reforms in Greece, the cabinet postponed a decision on Thursday on one of the measures announced last week, the decision to put tens of thousands of public sector workers on the road to redundancy.

“We must discuss the details with the troika,” government spokesman Ilias Mosialos said. Other government officials said the cabinet had drafted three alternative scenarios that will be discussed with the inspectors before being finalised at a cabinet meeting on Sunday.

Athens has promised its EU, IMF lenders that it would put 30,000 public sector workers in a so-called labour reserve this year, lifting a taboo on the sacking of civil servants to meet a condition for continuing to get bailout aid. Agencies

But Greek officials say enforcing the measure is very complicated in a country where the constitution protects civil servant’s jobs.

The EU, IMF and ECB inspectors are set to comb through new austerity plans for at least a week. Most analysts expect they will approve the new, 8-billion euro tranche of aid. German Finance Minister Wolfgang Schaeuble said euro zone finance ministers would decide on the aid on Oct.13.

“I think euro zone finance ministers will in the end release the next tranche of bailout payments for Greece,” said Joerg Kraemer, economist at Commmerzbank. “They will not dare turn off the tap on Greece right now, it’s a political decision.”

Without new funds, Greece could run out of cash to pay state wage and pension bills as soon as next month. A default on debt repayments could wreck the balance sheets of banks across Europe and unleash a crisis in the global financial system.

Bailing out Greece has become a tough political proposition for other eurozone leaders to sell to their own voters.

A Greek official said Papandreou, who has already taken his case to Germany this week, might go to Paris on Friday after German deputies approved a stronger euro zone bailout fund. French President Nicolas Sarkozy’s office said the visit was not yet confirmed.

Papandreou’s PASOK party trails the conservatives by 5.8 points, according to the latest opinion poll. The conservatives want a renegotiation of the bailout deal to allow lower taxes and less austerity, something the troika has rejected.

Labour unions have called new anti-austerity walkouts and protests that may shake the lawmakers’ resolve to approve the rest of the measures, expected to come to a vote next month, after the property tax was backed by parliament on Tuesday.—



More news from