June 16, 2011 / 3:48 PM / 8 years ago

Analysis - Berlin seeks time to resolve own Greek aid dilemma

BERLIN (Reuters) - Germany wants Europe to postpone a new bailout deal for Greece to buy time for a compromise on involving private creditors that does not look like a climbdown that would entail political risks for Chancellor Angela Merkel.

German Chancellor Angela Merkel attends a session of the lower house of parliament Bundestag in Berlin, June 10, 2011. REUTERS/Fabrizio Bensch

Merkel will try to resolve this dilemma in talks on Thursday with the European Central Bank’s Mario Draghi and on Friday with French President Nicolas Sarkozy, with the ECB, Paris and European Commission all questioning Berlin’s position.

In a fresh example of how German politics dictate the timing of Europe’s crisis response — even when Berlin is in a minority along with the Dutch and Finns — its problems mean an EU summit next week is unlikely to yield a final deal on a new Greek bailout.

“The argument goes: We don’t know what to do, let’s buy more time,” said an EU source, blaming Merkel and Finance Minister Wolfgang Schaeuble, whose proposal that private creditors accept a bond swap to extend Greek debt maturities now looks in doubt.

With Sarkozy urging Europe to show a “sense of compromise” to help Greece and safeguard the euro, Merkel must make sure it is a compromise she can sell to her political partners at home.

European taxpayers, particularly in Germany, have funded much of Greece’s bailout. This has led to calls in the Bundestag lower house of parliament for private creditors, who hold huge sums in Athens government debt, to start sharing the burden.

German politicians and media are increasingly voicing the frustration of ordinary voters about bailing out a country whose people, they say, work less and retire earlier, although Merkel got in trouble for making such comments herself last month.

Unions in southern Europe argue that Germans take more holiday and retire at about the same age, but that has not stopped euroscepticism spreading among Merkel’s allies, partly explaining her insistence on creditors sharing the burden.

“Nothing will happen without the private sector, as some wish,” read a column in the Sueddeutsche Zeitung daily, adding that if Schaeuble does not secure such a deal, he “need not show his face in the Bundestag any more.”

NO PRIVATE SECTOR, NO MONEY

A delay would not necessarily pose a financing threat to Greece as it would depend on the EU and International Monetary Fund releasing a July tranche of the existing 110 billion euro (96.5 billion pound) bailout, providing breathing space to focus on the longer term.

Euro zone finance ministers were supposed to agree before the summit at the end of next week on how to keep Greece afloat until 2012 and beyond. The new 120 billion euro package would include 30 billion from privatisations and a simliar contribution from Greece’s private creditors.

But Berlin’s proposal for investors to accept a “voluntary” bond swap that would extend Greek sovereign debt maturities by seven years looks less than voluntary to the credit rating agencies, which have warned it would constitute a debt default.

“We have to face some political questions, which are being worked on at the highest level, and we also have to face technical issues, which require a lot more time,” an EU source said of Friday’s meeting between Merkel and Sarkozy.

Merkel was already accused of pushing up the cost of the current Greek and Irish aid packages with her procrastination, and in the intervening months her domestic political position has deteriorated further, with implications for EU policy.

The conservative chancellor won a second term in 2009 with a new centre-right coalition but has lost power in series of state elections, forfeiting her majority in parliament’s upper house.

In the Bundestag, she secured support for the new Greek deal only last Friday by promising that investors such as banks, insurers and funds would ease the German taxpayers’ burden of future aid for indebted euro zone states.

While German exporters have gained in competivity from the euro, there is increasing frustration here at the perception that the likes of Greece, Portugal and Ireland lack the will for painful reforms to slash their public debt and deficits.

Any appearance of a climbdown on the euro zone would be very damaging for Merkel, whose term is due to run until 2013, but whose relationship with her junior partners, the Free Democrats (FDP), is increasingly hostage to their growing euroscepticism.

As one FDP Bundestag member bluntly put it, if Merkel does not deliver on private creditors’ involvement, “then there will be no money for Greece.”

VIENNESE ROLLOVER

In one extreme scenario, some believe Merkel could even be forced to seek a confidence vote. This could bring to a head conflicts with the FDP, whose popularity has been sliding.

“There is a risk that the FDP get desperate, that they start believing that agreeing further money for Greece will hurt them badly in the next election,” said economist Juergen von Hagen at Bonn University, who thinks a coalition break-up is possible.

To avoid such scenarios, Germany has to use any respite in the deadline on Greece to find a compromise on what one finance ministry official called the diverging views stressing variously “the risks and the opportunities” of private sector involvement.

One model being studied by EU policymakers is the “Vienna Initiative” of 2009, when the main commercial banks agreed to maintain their exposure to debt in central and eastern Europe and roll over credit lines.

Fitch ratings agency has appeared to open the door to such a compromise by saying that while it would treat this as a “restrictive default,” it would keep Greek bonds rated at CCC, meaning the ECB could continue to accept them in its refinancing operations.

It remains to be seen whether this would satisfy German parliamentarians, who were promised “substantial” private sector involvement last week in return for a show of support on Greece.

Merkel is due to appear before a Bundestag European affairs committee next Wednesday, just before the summit and after euro zone finance ministers meet in Luxembourg. In the back of her mind will be the need for parliamentary support for a permanent euro zone support mechanism in a binding vote due in September.

The negotiations could also have implications for a crucial ruling on current euro zone rescue packages in Germany’s constitutional court in Karlsruhe, where a first public hearing is scheduled for July 5. A “no” from the top court would effectively slam the brakes on all euro zone aid schemes. (Additional reporting by Gernot Heller and Andreas Rinke; writing by Stephen Brown; editing by David Stamp)

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