German lawmakers see no alternative to more Greek aid

By Noah Barkin and Gernot Heller

BERLIN, June 6 (Reuters) – German Chancellor Angela Merkel faces intense domestic pressure to win concessions from Athens and involve private sector investors in a new aid deal for Greece, but the risks of a rebellion in parliament against further assistance are extremely low.

Despite tough talk from a vocal minority of Bundestag backbenchers, Merkel retains broad support within her coalition and among key opposition leaders for her stance that Greece should receive additional support to avert a wider disaster for the euro zone.

Several lawmakers from the ruling parties, who talked with Reuters on condition of anonymity, described that support as strong despite rising scepticism about whether more aid for Greece will ultimately solve the country’s debt problem.

Some of these parliamentarians say privately that a “hard” restructuring of Greek debt involving substantial losses for private holders of bonds is probably inevitable.

But even they admit that going down this path now carries too many risks — both political and economic.

“There is a widespread feeling of helplessness among members of parliament,” a lawmaker from Merkel’s conservative camp said.

“Nobody is really enthusiastic about new financial aid for Greece. There are lots of doubts about whether giving them billions more euros will help. But the problem is that no one wants to be blamed for standing in the way of aid if that leads to something dramatic.”

As a result, lawmakers are pushing Merkel to link new aid to ultra-strict conditions in the hope this will make a new package easier to sell to German taxpayers.

These conditions include external supervision of Greece’s privatisation programme, some form of private sector involvement in the package, and clear guidelines in the euro zone’s planned new bailout mechanism spelling out that all holders of Greek debt could be asked to shoulder losses in the future.

Merkel is expected to push hard on all three points at a June 24 summit of European Union leaders, where governments are expected to discuss and possibly approve a new deal that would effectively replace the 110 billion euro aid-for-austerity deal which Greece secured in May last year.

That package is now widely seen to have failed because it mistakenly assumed Greece would be able to return to the capital markets for funding next year.

 

CARROT AND STICK

A new bailout of Greece would need to be approved by all governments in the 17-nation euro zone and it would face some political opposition in several northern European donor countries. But Germany is by far the most important state because it would contribute most to the rescue, and other governments would probably take their cue from Berlin.

To keep German lawmakers on board for more aid, the government has been using a carrot-and-stick approach, promising them a greater say in future EU aid decisions, while at the same time warning in clear terms about the risks of vetoing a new Greek package.

That strategy has worked well. None of the leading parties in the Bundestag, including the opposition Social Democrats and Greens, have been willing to stand up openly and oppose more aid for fear of being blamed for the “catastrophe” European policymakers have warned could result.

Merkel’s allies have stepped up their rhetoric in recent days about the tough concessions they expect from Greece to reinforce the message that Athens will get no free ride.

“Greece is trying but its efforts are insufficient,” Volker Kauder, parliamentary floor leader for Merkel’s Christian Democrats (CDU), told the Bild newspaper on Monday, saying it was time the country resigned itself to “central European” living standards.

Kauder coupled that tough talk with another message, also clearly intended for his colleagues in the Bundestag.

“If the money for Greece is switched off no one knows what impact that will have on us,” he said. “The Americans thoughtlessly allowed Lehman Brothers to go bankrupt and that triggered a worldwide economic crisis.”

Merkel will probably be under no formal obligation to ask parliament to vote on a new aid deal for Greece, if as expected it is handled by the euro zone’s temporary rescue mechanism, the European Financial Stability Facility (EFSF).

But bypassing the Bundestag could be politially suicidal for her and she is already going out of her way to involve parliamentarians in the decision-making process.

Merkel and her Finance Minister Wolfgang Schaeuble will personally brief ruling party parliamentarians on the Greek situation on Wednesday evening.

On Friday, parliament will vote on two non-binding resolutions related to the crisis. Coalition officials said these resolutions are likely to set policy guidelines for Merkel on Greece and the bloc’s new rescue facility before she heads to the EU summit later this month.

 

PRIVATE SECTOR

Lawmakers say the best way to ensure widespread support will be for the government to get some form of private sector participation in a new Greek deal — a point that is likely to be highlighted in the resolutions parliament will vote on at the end of the week.

“We have to ensure there is at least a first step in this direction,” a leading parliamentarian from one of the ruling parties told Reuters, requesting anonymity.

But that may be the toughest goal for Merkel to deliver on in Brussels later this month.

She has made clear in private that a reprofiling of Greek debt — asking holders to extend the maturities of their bonds — is not an option because it could be seen by ratings agencies as a default.

The only alternative seems to be a “Vienna Initiative”-style debt rollover in which banks that hold Greek bonds are encouraged to buy more as their holdings mature. But Germany will have to spell out at the June 24 summit how this can work in practice if it is to win the backing of European partners.

Germany’s most important demand heading into the summit is for the inclusion of clear guidelines on private sector involvement in bailouts handled by the euro zone’s planned new rescue facility, the European Stability Mechanism (ESM), which is to go into force from mid-2013.

With less than three weeks to go until the Brussels summit, a majority of euro zone countries and the European Central Bank are fighting the inclusion of such language. But Merkel has described this as a “red line” for Germany where compromise will be impossible.

Merkel also supports the view that Greece’s 50 billion euro privatisation programme should be overseen by international monitors. Securing victories in Brussels on most if not all of these demands should be enough to ensure approval at home.

“There is a growing number of parliamentarians who oppose giving additional money for Greece,” said Juergen von Hagen, a leading German economist and authority on the debt crisis at Bonn University. “But Merkel, if she proceeds as she has in the past, can take the Bundestag hostage by presenting more aid as a fait accompli.” (Additional reporting by Matthias Sobolewski and Annika Breidthardt; Writing by Noah Barkin; Editing by Andrew Torchia)