Published on 29 Sep 2011

German ‘Yes’ offers Merkel scant relief

Schengen, on the border of Germany, France and Luxembourg, 07.30am

It is not the numbers in the Berlin vote that matter today. The vote will pass, the European Financial Stability Facility (EFSF) will be ratified. What is telling is that Chancellor Merkel is close to having to rely on the opposition.
I’m on the way there from Luxembourg. We passed the spot symbolising the most tangible dissolution of Europe’s internal borders, Schengen – the tri-border between Luxembourg France and Germany.

It seems fair to fear further splits between France and Germany over an extra haircut to Greece’s bond bankers. They seem close to signing up for a 21 per cent voluntary snip. New numbers emerging from Greece have opened up the possibility of a bigger haircut from Germany and the Netherlands. France, and the Frankfurt-based ECB fear its impact on the markets.

But Greece is just one problem. The bigger picture is that markets seem to have factored in the expectation of a fivefold increase in the size of the bailout fund that is being ratified by Germany’s politicians today.

Well, I had the exclusive pleasure of attending the EFSF in its Luxembourg offices yesterday,  where the secretary general of the EFSF showed me round an institution at the absolute epicentre of this ongoing financial crisis.  It is run by just 15 people (you can see my report here).

For some, the EFSF is the only solution, for others an embryonic finance ministry for Europe.  Its detractors fear the danger of  spreading the crisis north  from the Mediterranean.

The expansion of the EFSF to €780bn worth of guarantees from Europe’s most solvent nations is being voted on in Europe’s parliaments including, crucially, Germany today.

That will allow some €440bn of emergency lending at German-style low rates. Not just to the governments of Portugal Ireland and Greece, but also for the banking systems of non-bailed out countries such as Italy and Spain that might suffer from any Greek default.

But the fear is that is insufficient to cope with wider problems and stop the rot… So the US and others in Brussels are advocating using the €440bn as core funding to lever in five times as much – over €2tr.

It’s this American idea that the German finance minister has now called stupid, ruling it out as he tried to reassure rebelling government MPs in Berlin.

But it’s the very idea that led to this week’s stock market and banking rally. Either the German minister  has “misspoken” or the markets are in for a very rough ride.

Follow Faisal on Twitter: @FaisalIslam

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4 reader comments

  1. Andrew Dundas says:

    German public opinion has not appreciated yet that all that’s being offered are ‘Guarantees’ of funding – if it’s ever needed. Hardly any taxpayers’ cash has been handed over.
    Which is much the same as the UK’s Bank bail-out: it was a cashless wonder. And at least we got bank shares in return for promises. Politicians’ promises, by-the-way!
    The key point about these ‘promises’ is that if they are sufficiently large – trillions of Euros – they’ll deter adverse sell-offs, and they won’t need to be turned into cash (as Britain’s haven’t been) and they’ll just be listed as ‘government spending’ only because they’re contingent liabilities. Not actual cash.
    So it’s all a game of bluff. If investment managers around the world believe that French and German banks can’t be bankrupted by a Greek default (because of the promises made by Germany), then those banks will remain in business and the Euro-zone won’t collapse.
    But if if enough investors believe those promises won’t be kept, the game will be up!
    What & who do YOU believe?

  2. Alison Shambrook says:

    Much appreciate all Faisal’s clear explanations. Puzzled as to why there is not more media challenge to, and expectation of, Greece’s tackling its corruption. If I was German I would not be wanting to pay for Greece’s corruption.

  3. Framer says:

    I fear you have been captured in Athens of late like Paul Mason of Newsnight. He believes all he is fed because he wants to you normally don’t.

    However your sharp intellect seems to have gone astray in the heat.

    The Greeks are adept at telling economic untruths and exaggerating furiously but most of the ‘cuts’ have simply not happened yet or at all.

    Listen to this amazing interview on Today this morning (Monday) for a bit of honesty. Little wonder Stefanos Manos doesn’t get many votes.

    http://news.bbc.co.uk/today/hi/today/newsid_9605000/9605981.stm

    This amazing interview

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