Merkel scrapes win on Greek bailout

2012-02-28 08:12

Berlin - German Chancellor Angela Merkel scraped through a parliamentary vote endorsing a second bailout for Greece on Monday but faced a growing backbench revolt against pouring in more money in support of the eurozone.

The comfortable 496-90 victory, with five abstentions, was inflated by centre-left opposition support, but only 304 of Merkel's 330 centre-right coalition lawmakers backed the motion.

The Bundestag lower house voted shortly before Standard & Poor's cut Greece's long-term credit rating to "selective default", becoming the second agency to downgrade Athens after it announced a bond swap plan to lighten its debt burden.

Seventeen coalition rebels voted "No" this time, compared with 13 who defied Merkel last September in a vote to boost the eurozone rescue fund.

Analysts said the outcome could weaken her politically and make it harder for her to agree to strengthen Europe's financial defences, just when international pressure on Germany is rising.

"Merkel is losing her powers to convince, and the members of the Bundestag are losing their belief that everything will go according to plan," said Gero Neugebauer, a politics professor at Berlin's Free University.

The world's leading economies in the G20 piled pressure on Berlin at the weekend to drop its opposition to a bigger European bailout fund, telling Europe it must put up extra money if it wants more help from other countries.

European Commission president Jose Manuel Barroso added his voice on Monday, saying he expected a decision on strengthening the eurozone's financial firewall during March, although not at an EU summit on Thursday and Friday.

The chancellor, whose country provides the lion's share of the emergency funds, stood firm on the issue in an effort to ensure a convincing vote in favour of the €130bn rescue programme for Greece, its second since 2010.

Opening the debate, she acknowledged there was no 100% guarantee that the bailout would work, but rebuffed calls from rebels to let Greece default and leave the euro.

"Nobody knows what would be the impact of rejecting the second Greek aid package on the other bailout countries, Portugal and Ireland, or on Spain and Italy, or the entire eurozone and the world," Merkel said.

"As chancellor I have to take certain risks, but I cannot be reckless - my oath of office forbids that."

She called for speeding up payments into a €500bn permanent eurozone rescue fund so that it is fully capitalised within two years instead of five, and said her government saw no need to debate a bigger overall safety cushion now.

"With the voluntary debt restructuring for Greece we are entering new territory. If it is a success, then the contagion risk for other countries will be further reduced. Now we need to wait and see what happens," she said.

Greece formally launched the bond swap on Friday, under which private creditors will suffer real losses of around 74% on their Greek debt holdings.

If enough creditors agree to take new, lower value bonds in return for existing debt, Greece will have the power to force any creditors who do not sign up voluntarily to the deal to accept its terms under "collective action clauses".

This prompted S&P to follow the Fitch agency, which cut Greece's long-term ratings to its lowest rating above a default last week.

"We lowered our sovereign credit ratings on Greece to 'SD' (selective default) following the Greek government's retroactive insertion of collective action clauses," S&P said.

However, the move had been widely expected and S&P said that once the debt exchange was concluded, it would probably raise Greece's sovereign credit rating to 'CCC'.

Growing resistance

Merkel faces growing resistance to further bailout spending from public opinion and influential media.

"Billions for Greece - Stop!" Germany's best-selling newspaper Bild screamed across its front page.

"Don't go any further along this crazy path," it said, quoting leading economists who argue Greece would do better to default on its huge pile of sovereign debt and temporarily leaving the single currency.

For the opposition, Social Democratic (SPD) former finance minister Peer Steinbrueck said Merkel's "strategy of buying time has failed, because things have got worse and worse.

"Nearly two years after the first Greek aid package in May 2010, we are back to square one regarding Greece, regarding the risk of contagion to the eurozone, and regarding Germany," Steinbrueck said.

"Not only has the bill become more expensive but resentment and prejudice have grown considerably as well, with clichés about lazy Greeks running alongside images of ugly Germans."

Merkel has faced frequent sniping from critics of eurozone bailouts among her conservative Christian Democrats, the Bavarian Christian Social Union and the liberal Free Democrats.

The backbench revolt, coming on top of a humiliating setback over the nomination of a new federal president, may raise questions about her coalition's survival until elections due in 2013, when she is expected to seek a third term.

Facing huge domestic pressure to make sure Germany's eurozone partners get aid only in return for tough fiscal reforms - which Greece has failed to deliver - Berlin has sent conflicting signals on whether it will soften its stance.

Finance Minister Wolfgang Schaeuble, meeting G20 colleagues in Mexico this weekend, appeared open to merging the eurozone's temporary and permanent bailout funds to create a €750bn war chest. This would open the door to extra International Monetary Fund (IMF) support as well.

Merkel's "wait and see" line did not rule out a change of course next month, but the vote makes that more difficult.

Germans losing patience

Merkel's caution is driven partly by voter concerns and unease within her coalition, but also by a feeling in Berlin that market pressures are easing and there is no longer an urgent need to put up more money.

In fresh signs that the European Central Bank's (ECB's) move to flood banks with cheap three-year liquidity has helped stabilise bond markets, Italy and Belgium saw their borrowing costs sharply reduced at debt auctions on Monday.

But safe haven German Bund futures hit a five-week high, with traders citing Merkel's doubts about the success of the Greek rescue and her forecast of years of toil for the eurozone.

Ahead of a second injection of long-term cheap ECB money expected to total €500bn on Wednesday, the central bank said it had kept its emergency government bond-buying programme dormant for a second straight week.

An opinion poll published in a Sunday newspaper found 62% of Germans were against the second Greek rescue package while 33% were in favour. In a similar poll in September, 53% had been opposed and 43% in favour.

Germans are growing impatient with what Schaeuble has described as a "bottomless pit" in Greece.

Frank Schaeffler, the loudest eurosceptic among the Free Democrats, the struggling junior partners in Merkel's coalition, told parliament: "Greece has no chance of becoming competitive in the eurozone and it must therefore leave, and this must be accompanied by a real debt haircut worthy of the name."

At the same time, there is a growing awareness in Germany, Europe's leading economy, that its own prosperity is at risk as the debt crisis sucks in more countries and stifles demand within the currency bloc for German exports.

German criticism of Greece has reopened wounds dating from World War Two. Protesters in Athens burned a German flag earlier this month, while Greek newspapers have portrayed Merkel and Schaeuble in Nazi uniform.

Despite riding high in polls, Merkel has hit a rough patch - about 18 months before the next election - that has raised doubts about her grip on power.