Germany faces up to a Greek 'restructuring'

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The Independent Online

So-called "euro-bonds" would be "politically unrealistic and legally impossible", the German minister for Europe told reporters yesterday. Werner Hoyer cited the forthcoming judgment of the German constitutional court on last May's bailout of Greece as one reason why Germany would have to proceed with "caution" as the EU framed new rescue strategies.

Speaking at the German Embassy in London, Mr Hoyer said there had been "no agreement" as yet on the size of any future bailout fund and that "restructuring" of its sovereign debt remained an option for Greece. However, he also heaped praise on the efforts of George Papandreou, the Greek Prime Minister, to secure public finances and force through unpopular austerity measures.

Mr Hoyer was asked if the eurozone's governments had not fallen behind events again, as Portugal faced renewed pressure in financial markets. He indicated that the lessons of the past year – when Greece and Ireland both had to be rescued to the tune of almost €200bn – suggested that it was much more important to get an agreement right than to get one early.

Mr Hoyer, a Free Democrat member of the ruling coalition, acknowledged that there had been a decline in pro-European sentiment within Germany as a result of the financial burdens placed upon it by successive sovereign debt crises. But he focused on the constitutional court judgment as the key factor preventing Berlin from backing bonds issued collectively by the eurozone – or anything that resembled what he called a "liability union".

In December the finance ministers of Luxembourg and Italy, Jean-Claude Juncker and Giulio Tremonti – the former being chair of the eurozone group of finance minister – called for such bonds to be issued to reassure financial markets nervous about individual nations falling into default.

The acceptability of the euro, Mr Hoyer indicated, had been damaged by the outgoing president of the Bundesbank, Axel Weber, no longer being a candidate to succeed Jean-Claude Trichet as head of the European Central Bank. Mr Weber would have been the "personal embodiment" of financial stability for many Germans, Mr Hoyer said.

Europe's finance ministers met on Monday and agreed to set up a new European Stability Mechanism, with bailout funds of €500bn for future rescues, after the present arrangement ends in 2013, but postponed a decision on where the money will come from. The present European Financial Stability facility, a temporary rescue system, has a fund of €440bn.

Many commentators believe that the current joint IMF/EU fund is unequal to the task of rescuing a large state such as Spain. Yet the German government is still holding to the line that the funding has not been agreed.

Berlin also seems determined to avoid having to underwrite the debts of other eurozone members, and Mr Hoyer's resistance puts his government at odds with others, such as Italy and Luxembourg.

While he acknowledged that the EU could not allow "salami attacks" to erode the strength of the single currency, Mr Hoyer placed much more emphasis on the new Franco- German-designed "competitiveness pact", aimed at addressing fundamental imbalances.