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Greek Thorn in Germany's Side Will Rile the Euro

By Hans Parisis   |   Tuesday, 23 Mar 2010 05:33 PM

In the euro zone, we can expect German Chancellor Angela Merkel to follow through on her uncompromising position of no bailout for Greece, even if that puts her at unprecedented loggerheads with her own finance minister, Wolfgang Schäuble, over the Greek debt crisis.

The German finance minister sees the euro as proof of Europe's integration ability. He is willing to use German government aid to rescue Greece, if necessary.

This is precisely what Merkel wants to avoid at all costs and why she prefers, for example, an intervention by the International Monetary Fund (IMF).

Also interesting to know is that since last weekend, Schäuble has ordered his staff not to speak to anyone at the Chancellery. All contacts and information are to be channeled through top ministry officials.

Telephone conversations and the exchange of documents now require prior approval by department heads.

Even veteran finance ministry officials cannot recall anything like it.

Yesterday, the German central bank, the Bundesbank, said in its monthly report that it’s not the IMF’s job to help countries finance their excessive budget deficit.

“The IMF’s mandate stipulates that it may only use foreign currency reserves to bridge short-term balance of payment deficits,” the bank said.

Solving structural problems that don’t have a “foreign currency component, be it direct financing of budget deficits or funding of bank recapitalizations, is not commensurate” with its monetary mandate, the bank said.

That means that under normal circumstances, a direct intervention for Greece by the IMF is not in the cards.

Merkel apparently wasn’t informed about the latest Bundesbank. She said yesterday that there was “no question of an urgent decision in the European Council about aid for Greece” when EU leaders meet in Brussels on Thursday.

Meanwhile, European Central Bank President Jean-Claude Trichet told lawmakers in Brussels yesterday that “loans to Greece from other euro zone nations are a possibility as long as they don't mix up a transfer or subsidy that would give Athens financing advantages.”

“We can only be talking about a loan without any sort of subsidy elements,” he said. “As a precondition for such a loan, the extraordinary situation has to threaten the euro zone as a whole, and not just an individual country.”

Trichet also rejected Greece’s Prime Minister George Papandreou’s call for help in reducing borrowing costs, saying “a level of spreads” is “not part” of the precondition for any loan.

Merkel also said the nations “need to decide in what situation aid could be put on the agenda” at all.

“As far as Germany is concerned, such a situation is a last resort, in other words, imminent insolvency. Luckily, Greece isn’t in that situation,” she said.

Meanwhile, Greek 10-year bond yields rose to 6.44 percent yesterday, the highest since Feb. 25.

We can expect further volatility in the euro, which favors the dollar.

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