The confrontation between the European Central Bank and anGermy over bailing out Greece risks causing so much damage that officials may be forced to compromise.
“The balance of forces in the euro zone is a little like it was in the Cold War: both sides are brandishing deterrents that would be too horrendous to use,” said Philip Whyte, a senior research fellow at the Centre for European Reform in London. “It’s all going to turn on whether you can fiddle with debt maturities without calling it a credit event.”
ECB President Jean-Claude Trichet and German Finance Minister Wolfgang Schaeuble are at odds over investors’ role in the second Greek rescue in 14 months. The dispute turns on how politicians make good on a promise to push creditors to pay some of the cost, a step that Trichet said on June 9 could be an “enormous mistake.”
Unless a deal can be struck to guarantee Greece’s financing needs for the next 12 months, the International Monetary Fund has threatened to withhold its share of what remains of Greece’s original 110 billion-euro ($159 billion) bailout. Euro-area finance ministers have called a special meeting tomorrow as they try to avoid what European Economic and Monetary Affairs Commissioner Olli Rehn called a “Lehman Brothers catastrophe on European soil.”
Chain Reaction
He also warned against Schaeuble’s proposal that maturities on Greek debt be extended for seven years, an outcome that credit-rating companies said would be considered a default. That in turn could cut off ECB lending to Greek banks, setting off a chain reaction.
Turning up the pressure on politicians, Bundesbank President Jens Weidmann said the euro can withstand a default.
“The euro would even in this case remain stable,” he told German newspaper Welt am Sonntag yesterday.
By James Hertling and Jonathan Stearns
businessweek
