16th Sep 2019

Greek bail-out threatened by Germany-IMF stand-off

  • The German parliament on Monday is set to vote on the €130bn bail-out (Photo: Queenofhearts820)

Greece's second bail-out still faces hurdles as Germany and the International Monetary Fund (IMF) wait to see who moves first on financial commitments related to the deal.

The German parliament on Monday (27 February) is set to vote on the €130 billion bail-out, but lawmakers are linking their green light not only to laws passed in Greece to implement budget cuts and to a successful bond swap with private investors, but also to the IMF committing a clear sum to the programme.

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The IMF, however, has indicated it wants first to see a decision on increasing the firepower of the eurozone's bail-out funds, currently capped at €500 billion, a move Berlin continues to oppose.

EU leaders had promised to look at this issue at the end of the week during a two-day summit in Brussels. But on Friday, EU officials said the decision is very much up in the air, with a meeting of eurozone leaders on 2 March not confirmed yet precisely due to Germany's stance.

"It all depends on Germany being willing to give a figure or accept the merger of the two funds' firepower. The IMF needs a signal it will not be alone in securing the eurozone [from the sovereign debt crisis]," one EU official told reporters in Brussels under condition of anonymity.

With still some time left until mid-March when the IMF board is set to decide on the amount it will contribute to the Greek bail-out, the source did not rule out that another eurozone summit will be called next month to deal with the firewall issue if no steps are taken next week.

If all elements fall into place - all spending cuts enshrined in law next Wednesday and the bond swap completed with at least 66 percent, preferably 90 percent success rate by 11 March - eurozone finance ministers should rubberstamp the €130 billion bail-out on 12 March. This will prevent Greece from going bankrupt eight days later when it has to repay €14.5 billion worth of bonds.

The German vote, along with similar parliamentary debates and votes in Finland and the Netherlands, have added extra tension, however.

In a letter to German lawmakers in the budget committee, finance minister Wolfgang Schauble half-heartedly defended the bail-out: "There are no guarantees that the agreed path leads to success," he wrote. "It is perhaps not the last time that the German Bundestag will need to address the question of financial assistance for Greece."

He addde that there are no better alternatives, however.

The Bundestag is expected to wave through the bail-out, despite some 14 backbenchers from the ruling coalition opposing the move. Less sure is if they will agree to boosting the bail-out funds - a draft text by the ruling Christian Democrats and Free Democrats seen by the Daily Telegraph says Germany's engagement "has reached its limits" and should not be further stretched by agreeing to the firewall increase.

They rule out even a compromise solution of adding the unused €250 billion from the temporary European Financial Stability Facility (EFSF) to the €500-billion-strong European Stability Mechanism (ESM) set to emter into life in July.

One of the reasons for the German government's reluctance is a pledge given to the Bundestag in September that the country's exposure to EU bail-outs would not exceed €211 billion. The German constitutional court also ruled that any commitments overshooting the country's yearly budget (€306bn) would be unconstitutional.

Despite all the twists and turns, economists are confident that Germany will come round, even if it does push the decision to the very last minute.

"They need to give money to Greece, else it's going bankrupt mid-March. These two years have taught us that political processes are delayed to raise the stakes and push for more conditionalities, even when there is an agreement," Diego Valiante from the Centre for European Policy Studies, a Brussels think tank, told this website.

Greece on Friday passed the so-called Collective Action Clause (CAC) law enabling the retroactive changing of a bond's terms with a 66 percent majority of bondholders instead of seeking agreement among all bondholders.

Valiante noted that "this officially opens the debt restructuring season in the eurozone."

The future ESM bail-out fund also has CACs embedded in its founding legislation, which suggests more debt restructuring will come up. "Markets will welcome this because they like legal certainty, rather than not knowing where all this is going and what measures will be taken," Valiante said.

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