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Merkel Risking Clash Over Ireland's Bailout Terms in Push to Rescue Euro

German Chancellor Angela Merkel is resisting calls to ease Ireland’s bailout terms, underscoring the gulf on crisis-fighting steps that persists even among political allies.

Merkel and incoming Irish Prime Minister Enda Kenny, who was elected on a platform of renegotiating the bailout, Polish Prime Minister Donald Tusk and European Union President Herman Van Rompuy are among those scheduled to attend a meeting of European People’s Party leaders in Helsinki today. Their host is Finnish Finance Minister Jyrki Katainen, who has signaled he opposes lowering Ireland’s average loan rate of 5.8 percent.

“Authorities are drifting away from making big changes” to the rescue effort that they’d indicated earlier this year, Colin Fan, head of credit trading at Deutsche Bank AG in London, said in a note today.

As the EU’s end-of-the-month deadline for a reinforced plan to aid debt-strapped countries looms, German officials are showing more reluctance to forge a grand bargain to protect the euro. The European Central Bank’s hints of rate increases as soon as April add yet more urgency to fix the finances of peripheral euro states.

The ECB’s indication of a rate rise “is a shock to us,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The risks assigned to such a decision are high in a context of the periphery situation remaining under stress.”

Photographer: Michele Tantussi/Bloomberg

Germany's chancellor Angela Merkel. Close

Germany's chancellor Angela Merkel.

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Photographer: Michele Tantussi/Bloomberg

Germany's chancellor Angela Merkel.

Barroso, Leterme

Leaders including EU Commission President Jose Barroso, Italian Prime Minister Silvio Berlusconi and Belgium’s caretaker Prime Minister Yves Leterme gather in Helsinki as investors speculate that Portugal will be the next euro country to ask for a bailout after Ireland and Greece.

Risk premiums for Spain, Portugal and Italy have increased since the last EU summit, on Feb. 4, failed to endorse economic competiveness proposals floated by Merkel and French President Nicolas Sarkozy as a condition for aid. The euro has climbed as euro-area inflation accelerated.

The Finnish talks, which begin at 7:30 p.m., are billed as an opportunity for European People’s Party heads to discuss strategy before an EU summit on March 11. A second summit on March 24-25 at which leaders have pledged a “comprehensive” package of crisis-fighting and prevention measures will be a “turning point,” Van Rompuy said March 2 in Brussels.

“We will decide a global package for the euro zone and, at the end of March, we should be out of the woods,” he said.

Merkel’s Demands

For now, Merkel, as leader of the country that contributed the largest EU share to bailing out Greece and Ireland, is sticking to her demands: euro countries should strive to be as competitive as Germany and join it in setting national debt limits. She hasn’t signaled any change in her opposition to expanding the EU’s rescue fund.

“We can’t artificially reduce interest rates” to bailed- out countries, Merkel said March 2. “The Irish package was negotiated just a few months or weeks ago. I can’t say today whether we even need to make a change in that package.”

Her allies in the euro region include Katainen, whose National Coalition Party is among those facing a challenge from the anti-euro True Finns in April 17 parliamentary elections.

Merkel and Katainen’s comments highlight Europe’s north- south divide as peripheral states struggle to win investor confidence. Kenny and Greek Prime Minister George Papandreou separately visited Merkel in Berlin last month to lobby for a cut in the interest rates; both came away empty-handed.

“It is possible that comments out of Germany at the moment are simply establishing its bargaining position in order to get greater concessions from other Euro area countries,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a note yesterday.

Papandreou hosts a two-day meeting of European Socialist party leaders in Athens also beginning today, including Austrian Chancellor Werner Faymann and German opposition leader Sigmar Gabriel.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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