Merkel Backs Greek Loans From IMF, EU to Prevent a Default as Leaders Meet
Merkel Sets Greek Aid Terms, Sees IMF-EU Tandem as Last Resort
March 25 (Bloomberg) -- German Chancellor Angela Merkel laid out her terms for an aid package for debt-laden Greece, saying she supports loans from the International Monetary Fund and European governments as a last resort if default looms.
Asserting her clout as head of the European Union’s largest economy, Merkel ruled out an aid decision at today’s EU summit in Brussels, pushed for the IMF to be part of any eventual rescue, and called for tougher penalties on future deficit “trickery.”
“A good European is not necessarily one who rushes to assist,” Merkel told German lawmakers in Berlin today. “A good European is one who abides by the European treaties and national law and thus sees to it that the euro zone’s stability isn’t harmed. That’s our guidance for all decisions today and tomorrow, and also for the future.”
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. The euro steadied today, trading at $1.3444 at 9:45 a.m. in London.
The summit starts at 5 p.m., though at the last meeting on Feb. 11 a political declaration to back up Greece was made before the official start.
Trichet’s Reversal
European Central Bank President Jean-Claude Trichet took some pressure off Greece today by extending the bank’s emergency lending rules, saying its bonds won’t be cut off from ECB refinancing operations next year in case Moody’s Investors Service cuts its rating to a level comparable with other companies.
Trichet marked a reversal for the ECB, which said in January that it wouldn’t soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.
Greek bonds rallied, sending the 10-year yield down 4 basis points to 6.32 percent, 321 basis points above comparable German debt. That extra borrowing cost has risen from 273 basis points on Feb. 11 when the EU vowed “determined and coordinated action” to stanch the crisis.
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.
Greek Austerity Program
Greece, which needs to sell about 10 billion euros ($13 billion) 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 Group Inc. estimates that Greece may ultimately get aid from the IMF worth about 20 billion euros over 18 months, according to an e-mailed note today.
The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the euro’s 11-year history.
While the euro’s German-designed “stability pact” foresees financial penalties for countries that go over the limits, no country has been sanctioned since the currency debuted in 1999. The budget deficits of all 16 euro nations are forecast to exceed the EU’s limit of 3 percent of GDP this year after the worst recession since at least World War II.
‘Extraordinary Responsibility’
Europe has to “put a stop to trickery,” Merkel said. “As German chancellor, I’m aware of my extraordinary responsibility in this hour, because the German people placed its faith in a stable euro when it gave up the deutsche mark. This trust -- and the German government is united on this point -- must not be betrayed under any circumstances.”
Merkel has left open the possibility of pushing wayward countries out of the euro and sought a rewrite of European treaties to impose more fiscal rectitude. All 27 EU countries would have to back such an overhaul. The EU’s latest treaty, in force since December, took eight years to negotiate and ratify.
“We are facing an hour of truth,” said Laurens Jan Brinkhorst, a former deputy Dutch prime minister who now teaches at the University of Leiden. “The stability pact has to be reinvented and this time strengthened. The uncertainty is whether the whole union is ready for that.”
As the clock ticked toward the EU’s self-imposed pre-summit deadline to clarify what can be done for Greece, the EU’s central authorities chipped away at German resistance to setting up an aid mechanism under sole European management.
European Lead?
“The euro is not only a technical monetary arrangement, but also is the core political project of the European Union and must be defended,” EU Economic and Monetary Commissioner Olli Rehn told the European Parliament in Brussels today.
Germany opposes holding a separate meeting of leaders of euro countries before the Brussels summit starts, and it’s possible that all countries won’t sign up to an official statement on Greece, a German official told reporters in Berlin yesterday.
“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.”
As the EU wrestled over what to do for Greece, a decision by Fitch Ratings to reduce Portugal’s credit grade stirred concern that the crisis will escalate.
Fitch Ratings cut Portugal one step to AA-, calling a budget deficit that swelled to 9.3 percent of GDP last year a “sizeable fiscal shock.”
To contact the reporter on this story: James G. Neuger in Brussels at
jneuger@bloomberg.net Last Updated: March 25, 2010 06:18 EDT
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