23 January 2012

WSJ: Germany rejects bigger bailout

Germany rejected calls for boosting the size of the planned eurozone bailout fund, even as talks on restructuring Greek debt stalled over the weekend and raised the spectre of a possible Greek default.

European demands to ensure that the European Stability Mechanism, the permanent bailout fund that is expected to be launched in July, has sufficient firepower to stop the spread of financial contagion in the event of a Greek default is likely to dominate a series of talks this week between Chancellor Angela Merkel and European leaders and international officials. Italian Prime Minister, Mario Monti, has demanded that Germany do more to finance the eurozone rescue. Now, according to an unconfirmed report in the German weekly magazine Der Spiegel, Mr Monti and European Central Bank President, Mario Draghi, are calling for doubling the volume of the ESM to €1 trillion ($1.293 trillion) from the planned €500 billion.

Germany and the IMF have been pushing to increase the amount of debt written down in a Greek restructuring through a swap of old Greek bonds for new. But as those talks drag on, concerns are growing that the ESM won't be powerful enough to deal with the shock of a Greek default. An alternative to increasing the size of the ESM dramatically is to strengthen the IMF to allow it to play a bigger role in setting up firewalls in Europe. In December, EU leaders agreed to boost IMF resources by €200 billion. But little progress has been made over the past few weeks to turn that promise into hard cash.

Nevertheless, demands on German largesse are likely to increase as European leaders work out the details of the ESM treaty. That will likely mean that as the caravan of European leaders passes through Berlin ahead of the European summit, Ms Merkel will hear more calls for German generosity.

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© Wall Street Journal