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03/02/2010

The headlines have been confusing. "Germany Backs Greek Bailout," read the headline of one British paper in mid-February. "Germany to Lead Bailout of Greece," read another. More creatively, CNNMoney.com ran a story with the title "Germany May Put Lipstick on Europe's PIIGS," a reference to the list of southern European countries (plus Ireland) which are facing massive debt problems.

Yet the German government has been unanimous in its denial of such stories. Chancellor Angela Merkel has repeatedly said she is opposed to a bailout of Greece, most recently saying on Sunday night that "we have a treaty which rules out the possibility of bailing out other nations." Economics Minister Rainer Brüderle and Foreign Minister Guido Westerwelle have also been unanimous in their rejection of a German bailout of Greece.

"Before there is any discussion about aid, we expect that Greece will take care of all of its homework in terms of consolidation policies," Westerwelle said on Tuesday in Berlin. "I consider any other discussions to be superfluous, because they only serve to inject the markets with anxiety instead of confidence."

According to a story in Tuesday's Handelsblatt, Berlin now suspects that financial speculators might be behind the rumors of a German-led bailout. "The City of London and Wall Street are pushing hard for Germany to pay the bill for Greece, thereby enriching speculators," the paper quotes an unnamed German government advisor as saying. "That is why rumors are consistently launched to increase the pressure."

'Concerted Power Play'

The business daily writes of "irritation in Berlin over what seems to be a concerted power play."

The speculation centers on Greek efforts to raise €20 billion ($27.11 billion) by the end of May and a total of €53 billion by the end of the year to remain solvent. With a budget deficit at 12.7 percent of gross domestic product and €300 billion in sovereign debt, however, money won't come cheaply for Greece. Indeed, the Financial Times Deutschland reported last week that many German banks are uninterested in procuring additional Greek bonds.

Greece had originally intended to begin an estimated €5 billion bond issue last week. But announcements by the ratings agencies Standard & Poor's and Moody's that they may soon downgrade Greek -- in addition to turbulence on the financial markets -- led to a delay in the offering.

On Tuesday, Greece announced that it would once again delay the offering, saying it wanted to gauge the financial markets' response to additional austerity measures demanded by the European Union on Monday. The EU wants Greece to outline measures this week to save an extra €4.8 billion in addition to a previously demanded €8 to €10 billion in cuts. A 2 percent increase in value added tax, to 21 percent, a higher duty on fuel and further public sector pay cuts are thought to be under consideration.

Greek Prime Minister Georgios Papandreou said on Tuesday that if Greece could not borrow money at rates comparable to other EU countries, the results would be "worse than catastrophic." Bloomberg had reported that Greece was facing as high as a 7 percent premium, a variance of more than twice the German benchmark -- and a divide not seen since 1998. Expectations of further austerity measures, however, have led borrowing costs to drop on Tuesday, according to Reuters.

Wary of Greek Bonds

Germany's concerns about media coverage of the Greek crisis echoes accusations levied by Spain against the British media in mid-February. The Spanish intelligence agency CNI even began looking into "speculative attacks" on Spain and "whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces ... or whether there is something more behind this campaign," according to a report in the Spanish daily El Pais.

Spanish Infrastructure Minister Jose Blanco even said, "Spain is the victim of an international conspiracy to destroy the country's economic status, and then the euro. Nothing that is happening, including the apocalyptical editorials in foreign media, is just chance."

Still, despite the vehemence of German bailout denials, speculation is likely to increase ahead of Friday's visit to Berlin by Greek Prime Minister Georgios Papandreou. A Greek bankruptcy would be a major loss of prestige for the euro and, according to media reports on Tuesday, investors are still wary of buying any further Greek bonds.

Indeed, there have been numerous reports of a plan whereby state-owned banks in Germany and France would buy or guarantee up to €30 billion in Greek debt. Both Berlin and Brussels, however, hope that private financial institutions can be brought on board as well -- and have indicated a willingness to go after financial speculators, who have been betting against Greece.

On Monday, Luxembourg Prime Minister Jean-Claude Juncker, who also heads up the euro zone, blasted speculators, telling Handelsblatt that "we have the instruments of torture in the basement. We will display them if it becomes necessary." On Tuesday, the same paper quoted an unnamed German government advisor as saying that bankers shouldn't forget that new financial market regulations are up for discussion this year.