Germany, rest of EU at odds over solving Greek crisis

Merkel tells investors not to expect aid package this week

Bloomberg in Berlin
23 March 2010

German Chancellor Dr Angela Merkel told investors they should not expect this week’s European Union summit to agree on any aid package for Greece.

EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk that aired on Sunday.

Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Manuel Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels.

“Greece isn’t insolvent, and therefore the question about assistance isn’t the one we need to be talking about now,” Merkel said in the interview.

“We always talk about the so- called markets that always respond to signals. I think it’s important that we don’t create illusions.”

Papandreou is urging EU allies to announce a package that will help him steer the country’s borrowing costs lower and avoid the need for a bailout. Merkel signalled last week Greece might have to turn to the International Monetary Fund for any emergency finance, a shift that put her at odds with French President Nicolas Sarkozy and other backers of a European solution to the Greek budget crisis.

Signs of a split among EU leaders pushed Greek bonds lower last week.

Papandreou, who says current borrowing costs are unsustainable, is looking for help as €20 billion euros (HK$209.9 billion) of Greek debt mature over the next two months.

Last week, he said the EU should place “the gun on the table, so that the speculators can leave us [in] peace”.

Underscoring the urgency of the crisis, Merkel spoke with Papandreou on Sunday, the German government said. The Greek prime minister reiterated that Greece did not currently require financial assistance.

Euro-area countries must agree on a package of co-ordinated bilateral loans “as soon as possible,” Barroso said last week. In a Handelsblatt interview, he stepped up pressure on Merkel, whose government is the biggest contributor to the EU budget, by saying that she should set aside domestic concerns and that support for Greece was in Germany’s interest.

“The differences of opinion remain too great to expect concrete financial support” at this week’s summit, Erik Nielsen, chief European economist in London at Goldman Sachs, wrote in a note to investors. “I think we have another month or so to go before we have clarity.”

Papandreou has said he may turn to the IMF to overcome the crisis if EU leaders fail to agree on a lending facility, a move opposed by Sarkozy and European Central Bank President Jean-Claude Trichet, partly because it would show the euro region cannot solve its own crises.

After raising funds this month and in January, Greece still needs to sell about €10 billion of debt to finance the bonds that are maturing in April and May. Papandreou said on Friday that Greece was one step away from not being able to borrow.

Merkel rejected speculation that Germany had given up any support for an EU-led solution in favour of the IMF. “I remain very explicitly open” to either option should the circumstance arise, she said.

She signalled that greater budget discipline would be the price for her support for aid to Greece, denouncing what she called “superficial” solidarity. Speaking to members of her Christian Democratic Union two days ago, Merkel lauded the austerity package announced by Papandreou this month to cut the deficit to 8.7 per cent of gross domestic product from 12.7 per cent last year.

“There has to be solidarity that tackles the problem at its roots, not solidarity that’s superficial and in the end weakens everybody,” Merkel said at a rally in Muenster in the state of North Rhine-Westphalia. Germany’s most-populous state holds regional elections in May.

The government also sought to quell reports about divisions between Merkel and her finance minister, Wolfgang Schaeuble, who has “great reservation” about the IMF option.


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