Merkel Allies Signal Germany Backs Off Greek Restructuring Push

German Chancellor Angela Merkel
German Chancellor Angela Merkel. Photographer: Michele Tantussi/Bloomberg

German Chancellor Angela Merkel’s coalition may be backing away from signals it was willing to accept a Greek debt restructuring as the government tries to put off an outcome that some investors say is only a matter of time.

The parliamentary finance and budget spokesmen have both endorsed steps to avoid a restructuring before a meeting today of lawmakers from Merkel’s Christian Democratic bloc to discuss Greece. Merkel may give her own view on the matter when she briefs foreign journalists in Berlin at 11 a.m.

The comments in recent days contrast with the position of German officials as recently as last month, when Deputy Foreign Minister Werner Hoyer said a Greek debt restructuring “would not be a disaster.” Finance Minister Wolfgang Schaeuble referred to restructuring Greece’s debt in an interview in Die Welt newspaper published on April 14. He subsequently said his remarks had been misinterpreted. A Merkel economic adviser, Lars Feld, has called it unavoidable.

“It’s inevitable that Greece will have to restructure its debt” given the level of debt relative to the economy, Ben May, an economist at Capital Economics in London, said in a phone interview. “You can delay that by offering bailouts. It may well be in the rest of Europe’s interest to delay restructuring to give their own banking sectors time to prepare for that.”

French and German lenders accounted for almost two-thirds of lending to Greek public and private debtors as of Sept. 30, according to the Bank for International Settlements. French banks held $59.4 billion and German banks $40.3 billion, followed by U.K. and Portuguese lenders to Greece.

Banks Pushing ‘Hard’

German banks are pushing “hard to avoid a default,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by phone.

The urgency of Germany’s deliberations was underlined yesterday as Greece’s credit rating was cut two levels to B by Standard & Poor’s and Moody’s Investor Corp. warned of a downgrade.

Greece plans to sell 1.25 billion euros ($1.78 billion) of 26-week Treasury bills today. It has only sold 26-week and 13-week bills since getting the European Union-led bailout in May 2010. Greece’s last sale of 26-week bills, which raised 2 billion euros, were priced to yield 4.8 percent, more than Germany pays to borrow for 30 years.

The yield on Greek 10-year bonds rose 12 basis points yesterday to 15.6 percent, more than twice the level of a year ago when Greece accepted a bailout.

‘Even Bigger Problem’

Germany would consider more help for Greece to avoid restructuring, which would risk “maneuvering ourselves into an even bigger problem than we have already,” Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union, said yesterday by phone.

In return for steps that might include lower interest rates and longer maturities on aid, Greece must accelerate its state asset sales program to convince creditors it’s serious about cutting debt, Meister said.

“There’s no alternative to keeping afloat the idea that we need to help Greece help itself,” Norbert Barthle, CDU budget spokesman in parliament, said by phone on May 7. “We’ll just have to bite the bullet and go along with it, for believe me, the appetite for restructuring the country’s debt is not there.”

The premium investors demand to hold Greek 10-year bonds over equivalent German debt rose by nearly 3 percentage points since April 14 to 1,261 basis points yesterday.

A year after Greece received a 110 billion-euro bailout that aimed to stem the spread of the region’s sovereign crisis, the measure isn’t working. Euro-area finance ministers held an unannounced meeting on May 6 in Luxembourg to work on a new aid package for Greece.

Euro Tumbles

The euro tumbled the most in a year that day after Spiegel magazine reported that Greece was considering to leave the euro area and return to the drachma.

As with the Greek bailout a year ago, Merkel’s government is again beholden to Germany’s political calendar as it presses for a solution to the latest flare-up of the Greek crisis.

“I’m not sure that Germany has a fixed plan, but they want some clarification about the Greek issue before parliament votes on the ESM,” the post-2013 European Stability Mechanism for indebted euro-area states, said Holger Schmieding, London-based chief economist at Joh. Berenberg Gossler & Co.

That’s “very different from saying Germany has concluded Greece needs a haircut and is now executing its devilish plan,” he said in a phone interview.

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