After comments were made over the week-end in Der Spiegel magazine from Bundesbank President Jens Weidmann comparing ECB bond-buying plans to a dangerous drug along with follow up statements about parliaments not central banks mutualizing risks, German Chancellor Angela Merkel expressed her support for the president of the Bundesbank but fell short of endorsing his views.
Two days after Greek Prime Minister Antonis Samaras visited Berlin and pleaded for politicians to suspend their negative talk about the possibility of a Greek euro exit, Chancellor Merkel expressed a tone of caution and restraint.
“We are in a very decisive phase in combating the euro debt crisis,” Chancellor Merkel told public broadcaster ARD in an interview. “My plea is that everyone weigh their words very carefully.”
Merkel is faced with growing unease within Germany about the ECB’s plans to engage in bond buying of sovereign debt with other euro countries.
On July 26th ECB Mario Draghi said that he would do “whatever is takes to save the euro.”
Earlier this month, Draghi said that the central bank could intervene in the secondary market to help lower yields in debt ridden countries that need the Euro area bailout rescue fund (ESM) to purchase its bonds in the primary market.
While the Euro area is in a holding pattern awaiting the final decision of Germany’s constitutional court about the legality of German willingness to support bond buying through the ESM, the focus of concern in the Euro area has shifted to Greece. The final court decision will be reached on September 12th.
Greek PM Antonis Samaras has only 2-3 weeks left to cobble together an austerity package worth about €13.5-14 billion ($17.5 billion) for the next two years.
Greece is dependent on its second €130 billion-euro ($160 billion) rescue deal reached in March to give the debt ridden country the necessary cash to keep paying its salaries and other debts.
Under the bailout terms, Athens is required to scrape up €11.5 billion in cost cutting measures worth 5.5 percent of GDP over the next two years which it has promised to repay its international creditors.
Greece is required to honor its commitment of €11.5 billion to receive its next € 31.5 bailout payment scheduled for next month.
However, Athens is now stuck having to secure an extra 2 billion in savings through spending cuts to attain the required targets under the EU/IMF bailout package and account for losses in tax revenues. There are calls for a third aid program for Greece.
Greek PM Antonis Samaras requested last week that Greece’s austerity measures be spread out over four instead of two years.
Greece already has a poor record of missing deficit targets and implementing austerity measures. With unemployment rising and harsher austerity terms on the way, Greek’s economic future is a big concern in the euro area.
Next month, the Troika (IMF,ECB, European Commission) will audit Athen’s financial books and provide a detailed report in October to EU finance ministers about Greece’s financial condition.
In the meantime, the IMF is taking on a tough stand towards Greece inside the Troika.
The IMF believes that Greece’s mounting debts are unsustainable and have threatened to pull out of the rescue aid program.
German Chancellor Angela Merkel has previously made IMF participation a condition of any Greek bailout.
If the IMF pulls away from the rescue fund, the only solution left is for Greece’s public creditors, such as the European Central Bank (ECB), to write off a segment of Greece’s debt, which would result in Germany paying billions of euros.
Following the recent tough words by Bundesbank President Jens Weidmann amidst a growing climate of German resentment about their taxpayer money being used to support the ECB’s aid programs which includes an unpopular bond buying program last year, Germans are showing low tolerance for granting Greek PM Samaras a third aid package or extending the current austerity program by another two years.