Merkel Facing German Revolt Over Greek Bailout

Tyler Durden's picture

A few days ago, when summarizing the key weakness of the second European bailout, we suggested that the fatal flaw in the entire package (which is predicated upon the expansion of the EFSF to about €1.5 trillion for full efficacy) are the "82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Specifically, we explained, "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!" Sure enough, as the Telegraph's Ambrose Evans Pritchard confirms, the backlash has now officially begun.

German Chancellor Angela Merkel is facing a storm of protest at home after yielding to EU calls for radical action to shore up Spain and Italy, raising doubts over her ability to implement the package.

Frank Schäffler, finance chair for the Free Democrats (FDP) in the ruling coalition, said the summit deal threatened "the castration of Germany's parliament" by shifting budget power to Europe.

Jens Weidmann, the Bundesbank's chief, said the accord exposes Germany and other creditor states to "sizable risks" and greatly alters the EU's constitutional landscape.

Yes, that would be the head of the Bundesbank... The German Fed... The bank which, unlike the ECB, is actually putting the interests of the German people up front and center:

"The euro area has taken a big step toward a collectivisation of risks. This weakens the foundations of a monetary union where each is responsible for its own budget.

In the future, it is going to be even harder to uphold incentives for solid fiscal policies," he said. The choice of words undercuts claims by Ms Merkel, who has specifically denied that there is a "collectivisation of risks".

The outburst may complicate a forthcoming ruling by Germany's Constitutional Court on the legality of the bail-outs, though most legal experts expect the judges to tread carefully.

"Weidmann is like Thomas à Beckett," said David Marsh, author of a book on the Bundesbank. "He is no longer a Merkel man. He has gone over to the institution and is now sworn to defend the sanctity of German monetary conservatism."

It has gotten so bad in Germany that Merkel is now relying on the Social Democrats to endorse ger agenda. This is akin to Obama expecting the republicans to demand tax hikes for the uber wealthy.

Jacques Cailloux from RBS said EU leaders are at last "getting the message" but the deal is not enough to halt the crisis at any level. Greece's debt burden will fall by just 10 to 20 percentage points of GDP, still leaving it "unsustainably high" near 140pc next year.

Ms Merkel is relying on support from opposition Social Democrats to push the deal though the Bundestag, but this is politically dangerous and may threaten her grip on power if Germany has to put yet more money behind the summit pledges, as appears likely. Mr Schäffler said there is already talk of a "third rescue package" for Greece.

Jacques Cailloux from RBS said EU leaders are at last "getting the message" but the deal is not enough to halt the crisis at any level. Greece's debt burden will fall by just 10 to 20 percentage points of GDP, still leaving it "unsustainably high" near 140pc next year.

Cailloux looks one step ahead and reaches the same conclusion we derived last week: that the EFSF will need to get a place where more than a third of German GDP is tied to backstopping this particular CDO:

While the bail-out fund (EFSF) will be able to intervene pre-emptively to cap Italian and Spanish bond yields, it lacks the €2 trillion (£1.8 trillion) funding to be credible. "Nice tools but no firing power. A rolling crisis is still likely," Mr Cailloux said.

Translation: while FX markets have already opened in Australia, and the dollar has dropped to 78.1 against the JPY, and under 0.81 against the CHF, on ongoing uncertainty over the debt ceiling , it is once again the EUR whose role will be put into question this week once the market realizes that the "cohesive" European bailout may not be quite as cohesive as previously thought.