By Andreas Rinke and Ingrid Melander
German Chancellor Angela Merkel may fall short of a majority
in her own coalition for a crucial reform of the euro zone rescue fund meant to stop a sovereign
debt crisis spreading, in what would be a severe blow to her authority, a test
vote showed.
Talk of proposals to leverage
up the 440 billion euro ($598.5 billion) bailout fund to multiply Europe's
financial firepower lifted global stocks on Tuesday but made it harder for
Merkel to unite her fractious center-right coalition.
The Bundestag (lower house) is
sure to approve a widening of the scope of the European Financial Stability
Facility to aid weak states and banks, agreed by European leaders in July,
since the opposition Social Democrats and Greens say they will vote for the
measure on Thursday.
But a revolt by Euro skeptical
backbenchers hostile to further bailouts in Merkel's conservatives and their
liberal Free Democratic coalition partners may leave her without a majority in
her own camp.
In an internal vote on
Tuesday, 11 deputies from Merkel's CDU/CSU group voted against the motion and
two abstained. Coalition sources said they expected between 2 and 5 FDP
lawmakers to vote against and up to 6 to abstain.
If more than 19 coalition
lawmakers vote against or abstain, Merkel will be dependent on opposition votes
in a political humiliation that could weaken her ability to push through future
rescues.
European shares surged by 4.3
percent in the biggest one-day percentage gain since May 2010 and safe-haven
German bonds fell on reports that policymakers were
preparing decisive action to tackle the debt crisis.
The cost of insuring Italian,
Spanish and French debt against default also fell on hopes of a bold solution,
which appear to have little grounding in immediate political reality.
German Finance Minister
Wolfgang Schaeuble was forced to deny that any increase in the volume of the
bailout fund is planned in a bid to calm irate center-right lawmakers.
"We do not intend to
increase it," Schaeuble told n-tv.
That did not directly address
the question of whether the EFSF fund could be leveraged to raise more money to
prevent contagion spreading fromGreece to Italy and Spain, the euro zone's
third and fourth economies.
LIABILITY
Leverage would make it
possible to borrow more, probably from the European Central Bank, for financial
firefighting without increasing the EFSF's size, but critics say it would also
raise German taxpayers' liability for any losses.
Some lawmakers are concerned
that EU officials are just waiting for them to approve what they were assured
would be the final increase before pressing ahead with bigger bailout plans.
French Finance Minister
Francois Baroin made clear there were tactical reasons to avoid discussing how
to boost the fund's firepower before the German decision.
"It is out of the
question to put forward, three days from the Bundestag (lower house) vote, the
issue of whether we should increase the fund... Let's not open Pandora's box on
something that is a red flag for Germany,"
he said.
Prime Minister Francois Fillon
told parliament France would set out proposals to step up the
battle against "speculative attacks" on the euro zone once the German
vote was over.
The fund's status was bound to
evolve but it was premature to say whether it might work "like an equity
fund with a lever effect," Baroin added.
Merkel assured Greek Prime
Minister George Papandreou at a meeting on Tuesday evening in Berlin that
Germany wants a strong Greece and would do everything necessary for that. She
also said she was confident her coalition would have the votes on its own to
pass measures boosting the euro zone rescue fund.
Papandreou told Merkel that
Greece needed Europe's solidarity. "It is very important to receive a
signal of support from our European partners," he said.
Earlier, Papandreou had
promised German industrialists that Greece would meet its commitments under its
EU/IMF bailout program despite missing key fiscal targets so far.
"I can guarantee that
Greece will live up to all its commitments," Papandreou said.
Merkel told the same forum:
"We will provide all the help desired from the German side so that Greece
regains trust." However, some of her ministers have openly questioned the
country's ability to avoid default and stay in the euro zone.
DAMAGE
The Greek parliament approved
a deeply unpopular new property tax on Tuesday, one of several extra austerity
measures the government is rushing through to plug a budget hole uncovered by
EU/IMF inspectors earlier this month.
Ordinary Greeks, exasperated
by pay and pension cuts, mass unemployment and tax rises, staged new strikes
and demonstrations outside parliament on Tuesday. [ID:nL5E7KR0FY]
German and French government
economic advisers urged in a joint article on Tuesday that Greece be allowed to
write off around 50 percent of its debt and called for support for banks with
large Greek holdings. [ID:nL5E7KR0JX]
Greek Finance Minister
Evangelos Venizelos, back from talks with the International Monetary Fund, said
speculation on default scenarios was harming his country and it was crucial to
stick to the July 21 agreement on a second rescue for Greece.
Venizelos said the so-called
troika of senior EU/IMF inspectors would return to Athens this week and Greece
would receive the next 8 billion euro instalment of aid in time to avoid
bankruptcy next month. A source close to the team said they would probably
return on Wednesday to complete a review of compliance with the bailout
program. [ID:nP7E7II01Z]
Most analysts expect Greece
to get the cash but default anyway within a few months, perhaps early next
year.
European Central Bank board
member Lorenzo Bini Smaghi fueled expectations of a larger bailout pool by
saying on Monday that policymakers were working on "how to leverage the
money out of the EFSF in a more innovative and efficient way."
Citing U.S. programs to
rescue banks during the 2008-9 financial crisis, he said EFSF funds could be
used as collateral to borrow from the central bank, making more money available
for crisis fighting. His ECB colleague Ewald Nowotny also said an increase in
the funds available was being discussed, though it might not be as high as some
expected.
But German Bundesbank chief
Jens Weidmann, the leading hawk on the ECB's governing council, poured scorn on
such options, saying they would discourage politicians from taking tough
decisions to cut budget deficits and weaken faith in the euro.
The European Investment Bank,
the 27-nation EU's soft-loan project finance arm, denied a U.S. television report
that it might get involved in leveraged finance for euro zone bailouts, which
diplomats said was legally impossible. [ID:nB5E7KL004]
Credit ratings agency Standard
& Poor's was quick to warn when talk of leveraging the EFSF became public
last week that such a move could potentially trigger ratings downgrades for
leading euro zone countries Germany and France. [ID:nW1E7JU02F]
A senior EU official said many
ideas for how to leverage the rescue fund were being floated but it would take
time to check the legality of such options and build political consensus in the
17-nation euro zone for any change.
"Nobody wants to talk
about this before Thursday night," he said in a reference to the German
parliament vote. "It cannot be discussed formally before the Bundestag
(lower house) and maybe all other national parliaments have voted."
Slovak lawmakers will be last
to vote on the widening of the EFSF's powers on October 11, leaving little time
to agree on further measures before the bloc's next summit on October 17-18.
In Bratislava on Tuesday, the
junior government party rejected a proposal made by its larger partner aimed at
winning joint coalition support in parliament for plans to strengthen the
bailout fund.[ID:nL5E7KR2IR]
(Additional reporting by Alexandra
Hudson, Brian Rohan and Sarah Marsh in Berlin, William Jamesand Ana Nicolaci
da Costa in London,
Nigel Davies in Madrid, Nicholas Vinocur in Paris; Writing byPaul Taylor;
Editing by Janet McBride)
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Source : Reuters
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