Greece Praised as Merkel Signals Progress in Crisis Fight

Europe’s response to the financial crisis has advanced in the past two months with Greece, Italy and Spain making major efforts to restore investor confidence, a German government official said.

Chancellor Angela Merkel, who is due to meet with Canadian Prime Minister Stephen Harper in Ottawa on Aug. 16, will tell him that Europe has made progress in addressing the crisis since the two last met at a Group of 20 summit in Mexico in June, the German official told reporters in Berlin today on condition of anonymity because the talks will be private.

Merkel’s message to Harper follows her backing for European Central Bank President Mario Draghi’s Aug. 2 proposal to buy government bonds to help lower borrowing costs for Spain and Italy. With details still to be fleshed out and a German supreme court ruling on Europe’s permanent bailout fund pending, Canada and the U.S. are pressing Merkel to limit the crisis fallout.

By the time the court rules on Sept. 12, “the critical question will be whether Italy and Spain have made that very important decision to call for help or not,” Jacques Cailloux, chief European economist at Nomura International Plc, said in an interview with Francine Lacqua on Bloomberg Television. “It’s very difficult to see how these countries can return to a sustainable or stable financial market environment, and so international or external help seems to be needed.”

‘Reasonable’ for Spain

Spanish Prime Minister Mariano Rajoy left open the possibility that he would ask the ECB to buy sovereign bonds, while indicating he won’t decide before the central bank works out the mechanism’s details.

Spain, the euro area’s fourth-largest economy, sought a European bailout for its banks of as much as 100 billion euros ($123 billion) in June “because it seemed reasonable,” Rajoy said in Madrid today. “And now, if it seems reasonable, we will do the same,” he said. “As is logical, until we know what we are talking about, we aren’t going to take any decisions.”

German praise for Greece contrasts with a joint statement by German Finance Minister Wolfgang Schaeuble and U.S. Treasury Secretary Timothy F. Geithner on July 30. Then, they commended Ireland, Portugal, Spain and Italy and backed a commitment by European leaders to do what’s needed to defend the euro area without mentioning its weakest link, Greece.

Greek Slump

Greece’s economic slump, now in its fifth year, slowed in the second quarter as gross domestic product shrank 6.2 percent from the same period last year, compared with 6.5 percent in the first, according to government data released yesterday. Industrial production rose on an annual basis for the first time in four years in June and Greece beat its 2012 state budget- deficit goal for the period through July, according to preliminary Finance Ministry data published Aug. 10.

Greece’s debt agency raised the most at an auction in more than a year today to pay for a bond redemption later this month, even as finance costs rose.

Michael Meister, deputy parliamentary leader of Merkel’s Christian Democratic Union party, said in an interview on Aug. 7 that Germany has “a certain flexibility” in its insistence that Greece meet austerity targets under its bailout program to which Germany is the biggest single country contributor.

“We made a lot of good progress,” Poul Thomsen, the International Monetary Fund’s envoy in Athens, said on Aug. 5 after talks between Greece’s government and its international creditors. Talks are due to resume in Athens in early September.

Draghi Offer

Draghi’s offer for the ECB to help -- if governments act first by buying sovereign bonds through Europe’s bailout funds - - is another attempt by euro-area leaders to stem the crisis that began with Greece’s revelation of spiraling debt in 2009.

The 17-nation euro-area economy shrank 0.2 percent in the second quarter compared to the previous quarter, while German gross domestic product increased 0.3 percent and France unexpectedly avoided a contraction with GDP unchanged, according to national and European Union data released today.

Europe needs to use “overwhelming” force to tackle the crisis and stronger action by the ECB is only part of the solution, Canadian Finance Minister Jim Flaherty said on Aug. 1.

“It is clear that both the European Union and, I dare to say, the ECB are ready to take action once certain conditions are met, and if there is a request by some member state to go into a primary-market purchases program,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in an interview with CNBC today. All countries “have to decide themselves” whether to request bond purchases or other aid, he said.

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

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

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