The World from Berlin 'The EU Will Pay Even If Greece Doesn't Deliver'

Time is running out for reaching an agreement with private investors on a Greek debt haircut, with negotiations stalled over interest rates. Meanwhile Germany continues to reject pressure to increase its contribution to the permanent bailout fund. German commentators are pessimistic.

Clouds gather over the Acropolis in Athens on Jan. 24.

Clouds gather over the Acropolis in Athens on Jan. 24.

Tensions are running high amid urgent efforts to reduce Greece's huge debt, particularly between private investors and European leaders after talks stalled over the weekend.

On Tuesday euro-zone finance ministers outlined tough conditions for new bailout payments to Greece. They want the interest rate on new Greek government bonds swapped with private creditors to be well below 4 percent. But the Institute of International Finance, leading negotiations for the private bondholders, has demanded a 4 percent average on the new lower-value, longer-term bonds, which are critical to bringing Greek debt back to a sustainable level.

The lower interest rates are important to the EU finance ministers because any debt relief not provided by private investors will have to be compensated for by euro-zone members and the International Monetary Fund. But finding an interest rate for the new bonds that private investors will agree to voluntarily is proving to be problematic.

Negotiations with Greece's private creditors have been difficult despite the need for a rapid and successful conclusion to avoid insolvency. But a successful conclusion to the negotiations is a condition for finalizing a second crucial bailout package for Greece, worth €130 billion. Meanwhile time is running out. A deal must be reached soon if Greece is to meet an upcoming bond repayment deadline in March.

As Greece's financial situation worsens, there have also been calls for greater efforts from Athens, which has failed to meet the budgetary and reform targets agreed upon in exchange for aid.

Despite the deadlock, German Finance Minister Wolfgang Schäuble seemed calm in Brussels on Tuesday. "We continue the negotiations (with investors) as happily, but also as little susceptible to blackmail, as possible," he told reporters there. "That exists in every bazaar -- a final offer -- one shouldn't let oneself be overly impressed by that."

Schäuble's optimism may have been well-placed. On Wednesday afternoon, the Greek government spokesman, Pantelis Kapsis, said the country planned to finish the debt swap negotiations by the end of the week, though he added that things were "at their most delicate phase."

"It is obvious that what happens in the coming days ... will affect the course of the country in coming years," Kapsis added.

Schäuble, however, also issued a stern warning to Greece, insisting that the country must fulfil all EU austerity demands or risk forgoing aid. "If not all of the political parties pledge, independent of the results of the approaching parliamentary elections, to implement the austerity goals they have agreed to, it would be irresponsible of us to provide them with additional credit," he said early Tuesday.

Merkel Rejects Higher ESM Contribution

Meanwhile on Monday night euro-zone leaders finalized the permanent euro bailout fund, the European Stability Mechanism (ESM), clearing the way for the aid fund to be launched one year earlier than planned. The ESM is now set to replace the temporary European Financial Stability Facility (EFSF) on July 1.

The ESM will be funded with €500 billion to help struggling euro-zone countries, with Germany providing the largest share -- but on Wednesday German Chancellor Angela Merkel once again rejected pressure to increase her country's contribution, most recently from International Monetary Fund head Christine Lagarde.

"It makes no sense if we keep promising more money but don't combat the causes of the crisis," Merkel said in an interview with six European newspapers. "Amid all the billions in aid and rescue funds, we Germans also must watch that we do not lose our strength in the end -- because our possibilities are not endless either, and that would not help Europe as a whole," Merkel added. "We show solidarity, but must not forget (countries') own initiative."

On Wednesday German commentators criticized the politicians' handling of the crisis and debated whether Germany should contribute more to the ESM.

Conservative daily Die Welt writes:

"Those who want to lower Athens' debts substantially will not be able to avoid debt cancellation from the European Central Bank and the EU. Politicians should finally be honest with themselves and Europe's citizens and admit this. And not just in the case of Greece. The ESM permanent bailout fund and the temporary EFSF don't come for free. Because it's not just Greece, but also Portugal that will sooner or later need a second bailout program. And just like Athens, Lisbon will also need debt relief."

"The euro, with its benefits, is absolutely worth paying this price. But Europe's taxpayers have a right to be told about the real costs of the euro rescue."

Wolfgang Münchau, of the Financial Times Deutschland, writes:

"How can I know that the crisis is over? For now the answer is not on the markets. We have had repeated idiotic rallies led by people who believe that one can beat the crisis with optimism. We're in such a phase once again."

"The problem is not the amount of debt, and certainly not the sovereign debt, but the debt dynamics. Only when we get a handle on this dynamic will we be able to even begin finding a solution for the crisis."

"At the latest, the crisis will be over when the process of freeing the private sector from debt is over, and at the earliest when we finally stop the pro-cyclical crisis policies. Unfortunately it will still be a few years before we're out of this difficult phase."

The conservative daily Frankfurter Allgemeine Zeitung writes:

"Why must the 'permanent' euro rescue fund be increased if the Greeks, Irish, Portuguese, Spaniards and Italians are saving and reforming as much as they're said to be? There are good reasons for Germany's hesitation amid pressure to increase the ESM permanent bailout fund to €1 trillion. The not-so-successful euro rescue policies prove that the markets aren't convinced by big sums."

"Additional aid for Athens is unavoidable, as long as a Greek exit from the currency union isn't a political option. Athens is taking advantage of this. Greece and other nations in crisis continue to live beyond their means, spending significantly more than they earn even though they actually need a surplus. In the third year since the euro crisis outbreak one has to doubt whether Greece will ever be capable of competing in the euro zone. The Athens elite appear to be unwilling either to give up their plum posts or fight corruption and tax evasion. The EU will pay even if Greece doesn't deliver."

Financial daily Handelsblatt writes:

"Merkel's rejection of higher guarantees due to domestic political considerations caused big problems for the EFSF. … Now the euro zone is getting a new rescue fund, and with it the chance to do a better job. … Compared to its predecessor, the ESM has a major advantage: It will be equipped with capital stock of €80 million, which will give it more credibility in the markets and probably the top-level triple-A credit rating. The German government finally appears to be thinking about the size of the fund. The ESM agreement from yesterday foresees maximum funding of €500 billion."

"Double that amount would be better suited for making an impression on financial markets accustomed to massive floods of money. Still, it's all really about psychology. It's very unlikely that German taxpayers will lose their portion of the ESM funding. Calling on the ESM automatically means that a country loses its national sovereignty and becomes a quasi-protectorate of the euro zone. No country would do this if it could be avoided."

"Think big! The German government still has two months time to heed this advice. The deadline is the beginning of March. That's when the EU leaders sign the ESM contract."

-- Kristen Allen


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