Germany was forced to agree to bail out Greece for the second time in a year under strong pressure from the IMF following the resignation last month of Dominique Strauss-Kahn as managing director, the Guardian has learned.
Under its acting managing director, John Lipsky of the US, the IMF has taken a more hard-line stance and it warned Germany in recent weeks that it would withhold urgently needed funds and trigger a Greek sovereign default unless Berlin stopped delaying and pledged firmly that it would come to Greece’s rescue.
Senior officials and diplomats in Brussels confirmed that the IMF threat to pull the plug on its funding — in stark contrast to the line under Strauss-Kahn — had been defused because of a German climbdown.
As political turmoil continued in Greece on Thursday, with Greek Prime Minister George Papandreou scrambling to form a new government, the stage was being set for a political struggle between Europe’s powerbrokers over the fine print of a proposed new 100 billion-plus euro (US$141.4 billion-plus) rescue of Greece.
Berlin is deeply at odds with France and key EU institutions — the European Central Bank (ECB), the European Commission, the presidency of the Council of the EU and Eurogroup President and Luxembourg Prime Minister Jean-Claude Juncker — over the terms of a new deal.
While conceding the need for the new bailout, Berlin is insisting that the banks and other private creditors holding Greek debt suffer losses as part of the rescue plan, which is expected to amount to 125 billion euros, or about 90 billion euros if the Germans succeed in forcing losses on holders of Greek bonds.
Although international markets enjoyed a calmer day on Thursday, Juncker believes that imposing losses on investors could trigger a European version of the Lehman Brothers bank collapse — a so-called “credit event.”
“It’s a really ugly situation. The [German] idea is dangerous. It could provoke the gravest risk, that all three rating agencies declare a credit event and then there are big contagion risks for other countries,” Juncker said.
Nout Wellink, a member of the ECB’s governing council, warned that the EU bailout fund would have to double to 1.5 trillion euros if Greece fails to pay its debts and spreads financial turmoil to other countries. French President Nicolas Sarkozy was expected in Berlin yesterday for a summit with German Chancellor Angela Merkel, with the aim of finalizing a compromise.
Under Greece’s current 110 billion euro bailout, shared by the EU and the IMF, a fifth tranche of 12 billion euros is to be disbursed next month. Publicly, the IMF had been threatening to withhold its share of the money unless Greece’s funding gap for next year is closed.
Privately, sources said that Lipsky challenged the Germans on the fringes of a G8 summit in France almost three weeks ago and demanded that Berlin guarantee Greece’s borrowing requirements and put a figure on the pledge. The IMF ultimatum came a week after Strauss-Kahn, a former French presidential contender, resigned as IMF chief following his arrest in New York on charges of attempted rape and sexual assault of a hotel chambermaid.
Berlin blinked, according to participants in the negotiations, and 10 days after the IMF challenge, the Merkel government admitted for the first time that Greece would need a new bailout. However, it stoked further controversy by demanding that Greece’s private creditors take losses on their loans.
Before a series of crucial EU meetings starting this weekend, Berlin looks increasingly isolated in its demands, spelling trouble for Merkel at home, where the rescue of spendthrift eurozone countries is deeply unpopular. Merkel’s junior coalition partner, the liberal Free Democrats, on Thursday reiterated the need for the banks to take some of the pain in the Greek crisis.
The rescue scenario is also hostage to developments in Greece, with European leaders anxiously eyeing the political turmoil in Athens and questioning whether Papandreou would be able to deliver on his side of the bargain: savage spending cuts and tax increases aimed at raising 28 billion euros, combined with a 50 billion euro privatization program.
However, senior officials in Brussels worried that time was running out. Papandreou’s attempt to form a new government, win a vote of confidence and then drive the austerity package through parliament could take longer than scheduled, jeopardizing the planning in European capitals.
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