Rescue Package

Bundestag Backs Merkel on Greece

Angie to the rescue. Or not. Source: Huber/Reuters
Angie to the rescue. Or not.
  • Why it matters

    Why it matters

    Bundestag passage of a third bailout plan for Greece gives its advocate, Angela Merkel, some political breathing room in Berlin, but not much.

  • Facts

    Facts

    • Greece is to receive €86 billion, or $95 billion, to avoid insolvency through August 2018.
    • Ms. Merkel received heavy support from her own conservatives and her coalition partners, the Social Democrats, in the Bundestag vote.
    • It appeared that internal conservative party opposition to a Greek bailout did not increase in the vote on Wednesday.
  • Audio

    Audio

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German lawmakers on Wednesday overwhelmingly approved a third Greek bailout, delivering a potentially legacy-building victory to Chancellor Angela Merkel, who overcame internal political opposition to win more aid for the debt-ridden country.

The Bundestag said the measure was approved by 453-113 with 18 abstentions. The lower chamber has 631 members, suggesting that 46 German lawmakers did not show up for the vote, which was held during the summer break.

Although supporters outnumbered opponents by nearly four to one, the number of those openly opposing the bailout was 113, down from 119 in a July vote, signalling Ms. Merkel’s political exposure in a country where many oppose further bailouts.

Within the ranks of her own Social Democrats, 63 members voted no, with three abstentions and 17 no shows. The no vote appeared to remain steady from a previous vote in July on opening negotiations with Greece.

The Bundestag vote followed a three-hour floor debate that featured an endorsement of Ms. Merkel’s position by the German finance minister, Wolfgang Schäuble, who has been one of Greece’s toughest critics in Germany.

Ms. Merkel attended the floor debate but did not speak on the floor of parliament.

In July, only 60 of 311 members in Ms. Merkel’s Christian Democratic Union and its Bavarian offshoot, the Christian Social Union, had voted against opening talks on the €86 billion ($94 billion) rescue plan.

“The decision on further aid program for Greece is not easy. There are substantial reasons for and against (the third bailout) – politically and economically.”

Wolfgang Schäuble,, German Finance Minister

“The Christian Democrats who voted against Germany participating in the third Greek bailout weren’t rebelling against the chancellor,” Uwe Pun, a political science professor at the University of Trier, told Handelsblatt Global Edition. “They just wanted to send a very clear message that they don’t view another rescue package as the right instrument. Many in the union feel Greece needs to accept more responsibilty than it currently does.”

German approval was key to clearing the way for the third bailout, to enable Greece to receive a first tranche of money and make a big debt repayment due tomorrow to the European Central Bank.

Germany has been the largest single contributor to the bailouts, according to the European Commission, contributing €53.3 billion so far before the new commitments it has promised to make in the third rescue package.

Mr. Schäuble’s endorsement was notable. Only a few weeks earlier, the finance minister had floated the idea of Greece temporarily exiting the euro zone, before backing a third bailout in what many portrayed as a last chance to end the crisis.

But the victory for Ms. Merkel could prove temporary if Greece, as it has done earlier, fails to implement reforms and initiate privatizations. Also, the country’s future in the euro could be jeopardized should the International Monetary Fund, one of its major lenders, decide not to join in the third rescue effort.

The IMF has said it is reviewing Greece’s financial situation and won’t commit to the third package until October at the earliest. The fund, led by Christine Lagarde, has pushed for debtors to write off some of Greece’s debt, a taboo subject in Germany.

“The decision on further aid program for Greece is not easy,” Mr. Schäuble told the parliamentarians during the debate this morning in Berlin. “There are substantial reasons for and against (the third bailout) – politically and economically. It would be irresponsible not to use the chance for a new beginning in Greece.”

Mr. Schäuble mentioned a number of measures linked to the latest rescue package, including a reform of the pension and health systems, a liberalization of the energy market, privatization of infrastructure such as airports and improved taxation.

merkel arms spread-AP
Chancellor Merkel got what she wanted – majority support from German lawmakers for a third Greek bailout. Source: AP

 

He said Greece had already agreed to many of these measures and had made “progress” in implementing some of them.

“If Greece stands by its obligations and the program is completely and resolutely implemented, then the Greek economy can grow again,” Mr. Schäuble said. “The opportunity is there. Whether it will be used, only the Greeks can decide.”

In a sign of change, the Greek government yesterday approved the sale of the operating rights of 14 regional Greek airports to Fraport, the German operator of the Frankfurt airport.

Whether Greece will follow through on its austerity and privatization promises remains to be seen.

Greek Prime Minister Alexis Tsipras faces fierce opposition from the hard-left of his Syriza party and could be forced to call a confidence vote soon.

If so, however, he could find himself dealing with a government that is stable but more willing to push through bailout conditions that are unpopular among Syriza hardliners.

There is also a possibility that Mr. Tsipras may call for early elections as soon as next month now that the bailout deal is in place.

Mr. Tsipras’ party was voted into office on a promise to end the country’s austerity program. After tough discussions with creditors, however, he was forced to drop the promise to receive rescue money and keep Greece in the 19-country euro zone.

Germany, through government spokespersons, has said it remains confident of continued financial support for the third financial aid package from the International Monetary Fund.

Mr. Schäuble called IMF support “indispensable.”

The existing IMF support program to Greece is set to expire in March 2016 and Ms. Lagarde has said she wants to wait until an October review of the bailout’s implementation measures before making a decision.

Ms. Merkel may need to use all her persuasion skills to win over the doubtful IMF boss.

Critical voices were heard in the Wednesday morning debate, including some from Ms. Merkel’s rank and file.

“We don’t need a debt union in the European Union,” said Gerda Hasselfeldt, a member of the CDU and deputy chairperson of the CDU/CSU parliamentary group.

What Greece gets-01
Ms. Hasselfeldt said “the rescue package is not an investment.” The measure, she warned, would give Greece access to still more credit but what the country needed most was a stable government with stable structures to lure investment into the country. Who, she asked, would want to invest in a country that lacks a functioning tax system and is buried in a mountain of debt?

In Wednesday’s German-language print issue, Handelsblatt answered several key questions readers about the Greek aid package and its consequences. Here in English is a summary of that discussion.

 

  1. How much money does Greece actually need?

The honest answer is: nobody really knows. Experts from the country’s lenders — the European Commission, European Central Bank, International Monetary Fund — as well as the bailout fund known as the European Stability Mechanism have calculated the country’s financial needs for the next three years based on statistics and forecasts. The bottom line of this complex calculation is that Greece will need around €86 billion, or $95 billion, to avoid insolvency through August 2018. It’s also clear that Athens requires €41 billion through the end of November to stabilize the country’s banks and to service its debt. But Greece’s overall financial need over the next three years could vary greatly depending on its growth rate and whether it suffers a recession.

  1. Why weren’t the first two bailouts enough?

The first bailout made up of bilateral loans from euro-zone nations and the IMF totaled €110 billion, €73 billion of which was actually paid. It was too small from the get go: the euro-zone leaders underestimated how deep Greece’s recession would be and Athens failed to push through necessary reforms. The second bailout package of €164 billion was put together in July 2011 and private creditors were forced to accept a debt haircut. This placed Greek banks in a difficult situation and they promptly cut their lending next to nothing. Nevertheless, despite the constant fighting over austerity and the need for new elections in 2012, by the end of 2014, Greece had stabilized enough that around €15 billion would have been enough to see the country eventually return to the financial markets.

However, elections in January brought the radical left Syriza party to power, which demanded an end to austerity.  The new government refused to make further cuts and the euro-zone members then refused to pay out €13.6 billion and the IMF held onto €17 billion from the second bailout package. Greeks began to clear out their bank accounts and Prime Minister Alexis Tsipras instituted capital controls. Greece essentially became insolvent shortly before the E.U. summit on July 12.

  1. Why should Greece be shielded from bankruptcy?

The European single currency is meant to be irreversible. Should a country leave the currency union, bank analysts and economists expect the markets would then consider the euro a looser currency association. Any country weakening economically would face a massive wave of speculation that could force it to abandon the euro. Italy and even France could be vulnerable. And if Greece returned to the drachma, the vast majority of its euro-denominated debt would have to be written off and Athens would still require emergency help. In the case of a Greek meltdown, Angela Merkel would also have to admit her euro policies of the past five years have been a complete failure.

  1. How will the new billions be used?

According to its international creditors, Greece needs €54.1 billion to service its debt owed to the ECB and the IMF, as well as paying back a €7 billion bridging loan that it recieved in July  from the E.U.’s EFSM bailout fund. Another €7.6 billion will be a cash reserve that will keep the Greek government solvent. Yet another €7 billion will be used to pay off what it owes both domestically and abroad. Some €25 billion are needed to recapitalize the country’s banks.

The bailout figure of €86 billion was reached after subtracting the amount that Greece is expected to contribute itself through cuts and privitization. The country needs in total €93.7 billion. However, the lenders are subtracting €6.2 billion to be raised from privitizations, and €2 billion from the primary surplus.

  1. What will the privatization fund do?

The German government forced Greece at the July 12 summit to accept the creation of a fund to speed the privatization of state assets. Scheduled to be operating by the end of 2015, the fund will manage the sale of ports, airports, property and even banks. Long-term it is meant to add some €50 billion to Greek government coffers. Around 75 percent of the funds raised from privitizations will go toward paying off the country’s debts, the rest can be used for investment. However, many observers are skeptical about whether €50 billion is at all realistic. Nevertheless, the government has already made a start, announcing on Tuesday that it will sell 14 regional airports to Frankfurt-based operator Fraport for €1.2 billion.

  1. Will the third bailout will be enough?

The optimists say that Prime Minister Alexis Tsipras has finally understood what’s at stake after staring into the Grexit abyss and he’s prepared to offer “reforms for money.” His coalition is less beholden to Greece’s notorious vested interests. If Mr. Tspiras can stabilize his government either through a confidence vote or new elections, he could emerge as a strong statesman, one who finally leads Greece back to growth.

The pessimists are predictably more skeptical, pointing out several eventualities that could torpedo Greece’s path to recovery. They say Greece has been unable to implement any substantial reforms over the past five years and any efforts to hike taxes and cut spending could just prolong the country’s grinding recession. Much will depend on how Greece uses the €35 billion in E.U. funds earmarked for investment. There’s a chance it could all go well – but plenty of risks lurk.

  1. What’s Germany’s share of it all?

Germany is liable for €15.2 billion from the first bailout and €38.1 billion paid by the temporary EFSF bailout fund for the second bailout. German guarantees for the third bailout would amount to €23.22 billion via the ESM. Theoretically, Germany is also liable for any losses the ECB might suffer in the case of a Greek default. Munich’s Ifo Institute calculated that Germany’s per capita responsibility before the third bailout amounted to €935.

  1. What’s changing with the euro bailout fund?

The new loans of €86 billion for Greece will be paid out in stages by the newly created European Stability Mechanism. They will be financed by debt placed on capital markets. The ESM replaced the temporary EFSF fund that was used for the second bailout. The ESM has a permanent capital base of €700 billion, of which Germany funded €190 billion. That allows the ESM to finance the latest bailout on its own and shields the euro-zone members from further costs. Like the EFSF, the ESM is based in Luxembourg. It is headed by the German civil servant Klaus Regling.

 

Donata Riedel and Ruth Berschens are correspondents in Berlin and Brussels. John Blau is an editor with Handelsblatt Global Edition in Berlin. To contact them: riedel@handelsblatt.comberschens@handelsblatt.com, blau@handelsblatt.com.

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