Germany Backs Cyprus Aid as Schaeuble Cites Default Risk

German lawmakers approved a rescue for Cyprus as Finance Minister Wolfgang Schaeuble warned that refusing aid to a fifth crisis-ravaged state risked triggering a sovereign default and contagion to other euro nations.

The lower house, or Bundestag, backed German participation in the 10 billion-euro ($13 billion) financial lifeline by 487 votes to 101 with 13 abstentions in Berlin today, almost three years after the euro-area debt crisis first required lawmakers to act in May 2010. Lawmakers also approved extending aid terms for Ireland and Portugal.

“We must avoid turning the problems in Cyprus into new problems for other euro countries,” Schaeuble told lawmakers in a speech before the vote. “Cyprus is in a dramatic situation. If we don’t help Cyprus, then Cyprus inevitably faces sovereign default.”

The euro rose after the vote, and was up 0.1 percent to $1.3046 at 2:15 p.m. in Berlin.

Help for Cyprus from the European Stability Mechanism, the euro area’s rescue fund, passed by an overwhelming margin after the two biggest opposition parties signaled support for Chancellor Angela Merkel’s plan to contribute to the latest bailout since the debt crisis began in Greece in 2009.

Election Dilemma

Political feinting over Cyprus has underscored the opposition’s dilemma in tackling Merkel on her crisis handling as she seeks a third term in Sept. 22 federal elections.

Merkel’s crisis policy of aid in return for fiscal austerity and losses for creditors has helped lift voter support for her Christian Democrats to the highest since she took office in 2005. Germany is the largest country contributor to euro-area rescues after committing as much as 211 billion euros to keep the currency union together.

Schaeuble said that the approach of structural reforms in return for aid is yielding results in countries such as Spain and Greece even as they struggle under “catastrophic” levels of unemployment.

“We aren’t over the hump, but after comprehensive reforms Europe and the euro are in better and more stable shape than ever before,” Schaeuble said in an e-mailed statement after the vote. “The gap between north and south is closing.”

Opposition Backing

The opposition Social Democratic Party and Greens broadly agreed with Merkel’s coalition to cap taxpayer-funded bailout loans for Cyprus and force the Mediterranean island to reduce the size of its banking industry.

“We have solidarity with Cyprus, but we don’t have solidarity with a business model that’s a self-declared paradise for tax evaders and money launderers,” Social Democratic opposition leader Frank-Walter Steinmeier told lawmakers during today’s debate.

A poll last week showed almost two-thirds of Green and SPD voters approve of Merkel’s crisis handling, which has sought to balance rescue fatigue among German voters with her pledge to avoid a breakup of the 11-year-old currency used by 17 nations.

Total aid for Cyprus, including a bail-in, stands at 21 billion euros after varying from 17.5 billion euros to 23 billion euros, Michael Grosse-Broemer, the chief whip of Merkel’s Christian Democratic bloc, said this week.

The bailout accord brokered this month “in the main” meets Greens demands, Priska Hinz, the party’s budget spokeswoman, said in an interview.

‘Strong Signal’

Green lawmakers sought three main conditions in the accord: a monitored plan to tackle money laundering; adoption in Cyprus of a “fairer” corporate tax rate; and the harnessing of large-scale deposits and shareholdings to help pay for the restructuring of Cyprus’s two largest banks, Hinz said April 15.

While the government motion to aid Cyprus was easily carried, Merkel failed to secure the so-called Chancellor’s majority comprising at least 311 votes from the 620 seats in the Bundestag, a breakdown of the votes cast showed. With 303 votes, Merkel had to rely on the opposition to secure passage.

Of the 237 seats held by her CDU/CSU bloc, 220 lawmakers backed the aid program, 10 rejected it and one abstained. Among her Free Democratic coalition partner’s 93 lawmakers, 83 voted in favor and 8 against with one abstention. A total of 601 votes were cast, one less than announced in the chamber, the breakdown showed.

German lawmakers “recognized their responsibility for the euro and the euro zone, sending a strong signal,” Schaeuble said after the vote. The euro is indispensable for the German economy and “whoever rattles the joint currency’s foundation is ignoring the facts and endangering Germany’s economic success,” he said.

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