Sunday 17 December 2017

Germany asserts clout to impose Greek aid conditions

German Chancellor Angela Merkel. Photo: Getty Images
German Chancellor Angela Merkel. Photo: Getty Images

James G. Neuger

Germany will press today to end weeks of European haggling over an aid package for debt-laden Greece, seeking new rules to impose fiscal discipline on countries using the euro to buttress the faltering currency.

Asserting Germany’s clout as the European Union’s largest economy, Chancellor Angela Merkel ruled out an aid decision at today’s EU summit in Brussels, pushing for the International Monetary Fund to be part of any rescue, and called for tougher penalties on future deficit violators.

“The German strategy for the next couple of months is very simple: provide just enough positive rhetoric that investors continue to purchase Greek bonds,” said Peter Zeihan, an analyst at Stratfor, a geopolitical risk consultancy in Austin, Texas.

“On the flip side, they want to make sure via rhetoric that there’s just enough doubt that the markets demand a much higher spread than the Greeks are hoping for. The Germans want to make very sure that the Greeks are punished.”

Squabbling over Greece and concern that fiscal woes will engulf Portugal, which was stung by a debt downgrade by Fitch Ratings yesterday, sent the euro to a 10-month low against the dollar and its weakest ever against the Swiss franc.

French officials declined to comment before the summit even as German officials advocated IMF involvement and outlined the price of their helping Greece cut the biggest EU budget deficit.

In an effort to shape the European debate, Merkel made a last-minute decision to outline Germany’s stance to the Bundestag today before heading to Brussels.

Weaker euro

The summit starts at 5 p.m., though at the last meeting on February 11 a Greek accord was struck before the official start.

The euro, which slumped 1.4pc to a 10-month low against the dollar yesterday, rose 0.1pc to $1.3327 at 7:11am in London. It fell to 1.4271 Swiss francs, the weakest since the euro started in 1999.

Central bankers led the charge against an IMF option. An appeal to the Washington-based lender of last resort would be “detrimental to the stability” of the 16-nation currency because it would show that Europe is unable to keep its own house in order, European Central Bank Executive Board member Lorenzo Bini Smaghi said.

“The image of the euro would be that of a currency that is able to survive only with the external support of an international organization,” Bini Smaghi told Germany’s Die Zeit newspaper yesterday.

Greek bonds fell yesterday, pushing the 10-year yield up 6 basis points to 6.36pc, 330 basis points above comparable German debt.

That extra borrowing cost has risen from 273 basis points on February 11 when the EU vowed “determined and coordinated action” to stanch the crisis.

Borrowing costs

Greece isn’t seeking EU handouts, government spokesman George Petalotis said on state-run NET TV. The goal for the summit is “European solidarity” that will help bring down Greek borrowing costs, he said.

Greece, which needs to sell about €10bn of bonds in coming weeks, may need to turn to the IMF in the absence of European aid, Prime Minister George Papandreou said on March 19.

Goldman Sachs estimates that Greece may ultimately get aid from the IMF worth about €20bn over 18 months, according to an emailed note today.

The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7pc of gross domestic product this year from 12.7pc in 2009, the highest in the euro’s 11-year history.


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