Merkel and Hollande want Greece Destruction to Remain on Schedule

Both Merkel’s and Holland’s stances are that Greece must suffer the pain related to being owned by European banksters. The PM’s have said they won’t move a muscle to easy the destruction and consolidation of the mediterranean country.

By STEPHEN BROWN | REUTERS | AUGUST 24, 2012

Angela Merkel and Francois Hollande presented a united front towards Greece on Thursday, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.

The German and French leaders met in Berlin to fine-tune their message to Prime Minister Antonis Samaras, who begins a charm offensive in Berlin and Paris this week in the hope of persuading Europe’s big powers that Greece deserves patience.

Merkel stuck to her policy of deferring to a report due in September on Athens’ progress by the “troika” of international lenders before discussing flexibility on the bailout terms, but said it was vital “that we all stay true to our commitments”.

“But we will, and I will, encourage Greece to continue on its path to reform, which has demanded a lot of the Greek people,” she told reporters before a dinner with Hollande set to be dominated by Greece.

“We want, I want, Greece to be in the euro zone, it’s a desire we have expressed since the start of the crisis. It’s up to the Greeks to make the effort that is essential for that goal to be met,” said France’s Socialist president, standing alongside Merkel.

German sources who attended the working dinner later told Reuters the two leaders had vowed to work “together and with resolve” to overcome the euro zone crisis and had also agreed that “credibility” was the key to rescuing Greece.

A source close to the French presidency said the two leaders had wanted to have a “straightforward” talk on a host of hot-button topics, from the euro zone to Syria.

Hollande plans to visit Spain on August 31 and Italy in early September, the source said. Both countries have seen their borrowing costs shoot up this summer amid market fears that the euro zone may start to unravel.

Samaras has given interviews to German media stressing that while Athens may seek more time to meet its fiscal targets, it is not asking for more money. But German Finance Minister Wolfgang Schaeuble and others seemed unconvinced.

“More time is not a solution to the problems,” Schaeuble said, addressing Samaras’ hopes that his country might be given four years instead of two to push through painful economic reforms, to alleviate the impact on the Greek people.

Schaeuble said more time could also mean “more money” and Europe’s help for Greece had already “gone to the limits of what is economically viable”.

From the sidelines, Dutch Finance Minister Jan Kees De Jager – a staunch ally of Berlin – urged Germany to “stick with its strict position” and giving Greece more time would not help.

European leaders say any decisions on Greece will depend on the report by inspectors from the “troika” – the European Commission, the European Central Bank and the International Monetary Fund.

Samaras is seeking what he calls “a bit of air to breathe” at a moment of rare optimism on financial markets that the EU and ECB are poised for decisive action on the euro debt crisis.

Behind their stern public message, Berlin and Paris may have little choice but to show some flexibility, with little appetite in either capital for forcing Greece out of the euro zone.

AFTER MERKOZY

In talks that also touched on banking supervision in Europe and the role of the ECB, as well as civil war in Syria, Merkel and Hollande hoped to replicate the “Merkozy” alliance that gave the euro zone some semblance of unified leadership under Hollande’s predecessor Nicolas Sarkozy.

The German sources described the atmosphere at Thursday’s dinner as good.

The Franco-German axis has been strained by Hollande’s calls for more measures to stimulate growth, a rebuff to Merkel’s strict agenda of austerity. Some German officials say the relationship with Hollande is off to a rocky start.

As Merkel prepares to campaign for a third term in 2013, in a country where the media is taking an increasingly tough line with Greece, she cannot cede too much to Samaras – or to the French Socialist government, which is allied with her main domestic opponents, the Social Democrats.

With German patience wearing thin after repeated requests for financial help from Greece, Spain, Portugal and Ireland, Merkel is under pressure to defend taxpayers’ interests while also upholding the stability of the currency.

Merkel will be watching Hollande’s attempts to meet his own deficit targets with spending cuts and tax measures in the 2013 budget, German officials say.

“If Hollande gives up on his targets because of rising domestic political resistance, we can hardly expect more painful reforms from states like Italy or Spain,” said one government source in Berlin, speaking on condition of anonymity.

There are signs that Merkel’s conservatives, if not ready to postpone Greek reform targets, may also find ways to be flexible if the troika finds Athens is broadly in compliance.

“With Greece, we cannot change the cornerstones of the aid package or tamper with the principle of conditionality. But I can imagine we could adapt certain things within that framework such as interest rates or maturities on credit, like we already did with the first package,” said Norbert Barthle, a member of parliament from Merkel’s ruling center-right coalition.

Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, said Greece was staring at its “last chance” to avoid bankruptcy.

Europe to Save its Banks, not Greece

by Floyd Norris
NYTimes
February 10, 2012

It now appears that Europe is prepared to pay what it needs to pay to save its banks.

But not to rescue Greece.

Once again, there is optimism that a new round of European talks are going to result in an announcement of a Greek bailout. On Thursday, the Greek political parties caved in and agreed to a new austerity package that will satisfy the latest European demands.

When other loose ends are tied up, it appears the Greeks will have given up their principal bargaining chip — the threat that if they are allowed to collapse, they will take the European financial system with them.

If that happens, then at some point down the road, when it turns out that Greece has again fallen short of its deficit reduction targets, Germany will again demand more sacrifices. If the Greeks refuse, then the rest of Europe could be in a position to let Greece go.

It might or might not stay in the euro zone, but a bankrupt Greece would be left to fend for itself, with much of the rest of Europe saying — just as it did two years ago, when Greece’s distress was just becoming clear — that it is a small country of little importance to the rest of Europe.

Perhaps Europe, in its stumbling and sometimes disorganized fashion, will have accomplished a large part of what it set out to do. It will have put a fence around the Greek tragedy and preserved — most of, if not all — the euro zone. As for rescuing Greece, well, you can’t win them all.

The current European attitude was best captured by a document that was circulated as part of the now-abandoned German proposal to force Greece to accept a “budget commissar” to supervise its spending.

“Greece has to legally commit itself to giving absolute priority to future debt service,” said the document, said to have been circulated by German officials. “State revenues are to be used first and foremost for debt service.” Whatever money was left over could be used for other purposes, such as paying police salaries or purchasing hospital supplies.

That was shot down because it sounded so undemocratic and authoritarian, said Whitney Debevoise, a partner in Arnold & Porter with long experience in international bond negotiations. “Plan B is the escrow.”

Escrow does sound like something neutral. But it apparently means the same thing. European aid to Greece would go into an escrow account, to be released as Europe saw fit and withheld if Greece again failed to live up to its promises to cut its budget deficit. But of course the money would be released for debt payments on the restructured bonds. For at least a few years, banks and others that own the new Greek bonds would be assured of collecting their interest payments.

“The euro area will be able to call the bluff of the Greek government,” said Jacob Kirkegaard, an economist at the Peterson Institute for International Economics.

“Greece says, ‘If we default, all hell breaks loose,’ ” he said. “The reality is that the threat from Greek contagion becomes a lot less credible.”

The escrow system may also persuade more bondholders to go along with the “voluntary” restructuring. Anyone who did not, hoping that the handful of unexchanged bonds would be paid since the cost would not be that great, would run the risk that Europe would release funds to pay debt service on the new bonds, but not on unexchanged old ones.

There have been Greek rescue packages before, followed by new crises. But this could be different.

By the time it becomes clear that Greece cannot meet its new promises, the recapitalization of major European banks may be completed, and in any case they will have no immediate worry of a Greek default. The European Stability Mechanism, the new European bailout fund, will be in place, and perhaps the International Monetary Fund will have raised more capital. The much-talked-about “firewall” could be a reality, preventing contagion.

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