Debt crisis: Germany bows to global pressure and signals Greek rescue deal
Published 20/02/2012 | 07:10
EUROPE’S key powers are on the brink of a €130bn debt deal to rescue Greece and avert the first sovereign default in Western Europe in over half a century.
Germany’s finance minister Wolfgang Schäuble toned down threats to force Greece out of the euro, bowing to intense pressure from France, Italy, and the US-led bloc of global leaders.
Mr Schäuble said the country is "on the right path" and signalled that pension cuts agreed by the Greek cabinet over the weekend would be enough to secure approval for the loan package from EU ministers on Monday.
"If Greece can implement all the necessary promises by the end of February and clear up any other open questions, the second aid package can be approved," he said.
Austria’s finance minister Maria Fekter said Greece faced stringent conditions on new aid but said that the "majority" of EMU countries not want to risk a dangerous misadventure that would cost even more in the end.
"We are not going to abandon Greece. It would be even harder for Greece to repay its debts with a devalued drachma," she told ORF television. A deal will unlock the next tranche of money from the EU-IMF Troika and allow Athens to meet a €14.5bn payment to creditors on March 20.
However, it is unclear whether the complex package can command political consent for long in either Greece or Germany. Greek elections in April may see a political revolution with the hard Left in ascendancy.
"If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma," said Theodoros Dritsas, a leading MP from the Syriza party.
In Germany, Chancellor Angela Merkel’s coalition partners are in revolt over the aid package. Bavaria’s finance minister Markus Söder said the stability of euro as a world reserve currency is more important than Greece’s welfare. "It would be better if Greece stepped out of the euro," he said.
The current package is already out of date since austerity has tipped the Greek economy into a violent slump, playing havoc with the country’s debt trajectory.
Officials say Greece’s public debt will still be 129pc of GDP in 2020, far above the 120pc ceiling set by the International Monetary Fund as a condition for its further involvement. A further €15bn will be needed.
Mr Schäuble said there might be wiggle room up to 123pc, but this still means that private creditors may face a yet bigger haircut after agreeing 70pc losses already.
The European Central Bank has already taken action to insure that it suffers no loss on its Greek holdings, automatically reducing other creditors to junior status. This sets a precedent for Ireland, Portugal. Spain, and Italy. Bond veterans accused the ECB of legal legerdemain that will have grave consequences.
The softer line from Germany comes after French premier François Fillon said it was "utterly irrepsonsible" to put the idea of a Greek default into play, and came close to saying that Chancellor Merkel needed to rein in her finance minister.
Mr Fillon said Greece was making serious sacrifices and that it now behoves Europe to "step up to its responsibilities."
Britain’s Foreign Secretary, William Hague, said it would be a technical nightmare if Greece is forced out of EMU.
"They don’t have the old currency sitting in the vaults ready to distribute. It’s not straightforward to leave the euro. It was built without exits," he told the BBC’s Andrew Marr show.
The Shadow Chancellor, Ed Balls, accused Berlin of playing with fire over recent weeks. "I don’t think Germany has faced up to the reality it’s in a single currency and there are collective obligations in a single currency," he told the BBC.
"A messy Greek default, which raises questions that the markets will ask Spain and Italy next, at a time when Germany and the European Central Bank are not able to face up to the common obligations you need in a single currency: that could lead to a crisis which would be very dangerous indeed," he said.
Mr Schäuble’s olive branch to Greece on Sunday came with the usual thorns. "You can only help people who wants to help themselves. We have been ready for some time to help the Greeks build a more efficient tax administration but the offer has still not been taken up," he told Tagesspiegel.
In fact, officials from ten EU governments, the European Commission, and the IMF are already helping Greece reform its tax system.