Merkel warning heeded as Greek bailout ratified

The German parliament yesterday approved a second, €130bn loan package for Greece after Angela Merkel, the chancellor, warned lawmakers that it would be irresponsible to abandon the country to bankruptcy.

Although the motion was always expected to be easily approved — the final tally yesterday was 496-90 with five abstentions — the idea of bailing out Greece has remained very unpopular in Germany, Europe’s biggest economy.

“The road that lies in front of Greece is long and truly not without risk,” Merkel told lawmakers before the vote. “That also goes for the success of the new programme — no one can give a 100% guarantee of success.”

Earlier yesterday, the mass- circulation Bild daily, which has always taken a very hard line on Greece, splashed the word “STOP!” over its front page. Its message to lawmakers was: “Don’t keep on going the wrong way.”

Merkel, however, said it would be irresponsible to risk a Greek bankruptcy.

She acknowledged that some people ask “whether Greece isn’t a bottomless pit, a hopeless case, whether it wouldn’t be better for all if Greece reintroduced the drachma”.

But she insisted that “the opportunities outweigh the risks of turning away from Greece now — I believe these risks are incalculable and therefore irresponsible”.

“As chancellor of Germany, I should and sometimes must take risks, but I cannot embark on adventures,” Merkel said.

The rescue package is Greece’s second in less than two years and also involves private-sector investors accepting total losses of more than 70% on the bonds they hold, along with tough new austerity measures.

Greece has been surviving since May 2010 on an initial €110bn package of rescue loans from other eurozone countries and the International Monetary Fund.

But more than two years of austerity implemented to secure the rescue funds have left the economy in freefall, with businesses closing in the tens of thousands and unemployment at a record 21% in November.

It isn’t yet clear exactly what Germany’s share of the new bailout will be, and the IMF’s input this time has yet to be determined. Merkel said “it is indispensable for the German government that the IMF continue to make a significant contribution and provide its experience and expertise”.

Several non-European members of the IMF, such as the US, are reluctant to boost the IMF’s resources for troubled eurozone nations, saying the region’s bailout funds should be increased in size first.

The need to strengthen the bailout funds was heightened yesterday, when ratings agency Standard & Poor’s lowered its credit outlook for the current fund, the European Financial Stability Facility, to negative.

It had already downgraded the EFSF in January after key contributors France and Austria were stripped of their top ratings.

But S&P noted Germany did not appear ready to make up for the fund’s lost creditworthiness by offering it new support.

S&P said the EFSF’s rating will therefore track those of France and Austria — AA+ with a negative outlook.

A high credit rating is important for the bailout funds because it makes it cheaper to raise money from investors.

The €440bn EFSF will be succeeded by the permanent €500bn European Stability Mechanism in July.