Markets tremble as Angela Merkel plays for time over Greece rescue deal

Chancellor Angela Merkel insisted today that Greece would need to commit to a tougher and longer austerity package in the form of a three-year IMF programme before Germany spent billions to help rescue the country from insolvency.

Four days after Greece requested a €45bn safety net from 15 EU countries and the IMF to ward off the prospect of a sovereign default, Merkel hedged her bets, but promised clearer answers within days.

The mixed signals from Berlin saw the financial markets heap further pressure on Greece with borrowing costs soaring to yet another record high. The yields on 10-year Greek bonds rose to 9-10% amid concerns that the package may not materialise and that Greece, whose national debt has ballooned to €300bn, may not recover enough to meet its repayments.

The euro weakened against the dollar and the pound today but Merkel stressed that the IMF rather than the European commission should be the main arbiter of the Greek government’s attempt to get the public finances into some sort of order. “If Greece is ready accept tough measures, not just in one year but over several years, then we have a good chance to secure the stability of the euro for us all,” Merkel said. “We need a positive development in Greece together with further savings measures.”

Berlin is to contribute €8.4bn of the €30bn in credits from the 15 countries that use the single currency, with another €15bn from the IMF. “Germany will help if the appropriate conditions are met.”

Merkel’s intervention failed to impress the markets with Michael Massourakis, chief economist at Alpha Bank, attributing the nervousness to the German reluctance to expedite the aid. “Nothing has changed over the weekend, except that Germany seems to be having some problems in committing itself to the rescue package,” he said. “Markets have been testing whatever decision has been made in the last two or three months, and I think every case of uncertainty makes [them] jittery.”

Officials from the commission, the IMF and the European Central Bank are in Athens working out the details of the rescue package which is also being negotiated at IMF headquarters in Washington by George Papaconstantinou, the Greek finance minister. The head of the IMF, Dominique Strauss-Kahn, is to go to Berlin on Wednesdayand Merkel clearly hopes he will help her overcome resistance in the German parliament to bailing out Greece.

The rescue package is deeply unpopular in Germany and Merkel appeared to leave herself wiggle-room. Wolfgang Schäuble, the finance minister under strong attack as a supporter of helping Greece, spent much of today trying to persuade parliamentary leaders to back the package.

Germany’s support is grudging, but Schäuble said the credits should be disbursed within three weeks since Athens needs to raise €8.5bn by May 19.

Merkel, who faces a crucial state election on 9 May, acknowledged that the stability of the euro was at stake and that Berlin would need to cough up. For months she has held to a hard line; now her toughness is beginning to look like indecisiveness. She has refused to commit unequivocally to saving Greece since Athens took the EU into uncharted territory last Friday by issuing its plea for help.

European leaders have repeatedly sought to calm the markets by delivering vague promises of support for Greece. They hoped the pledges would bring down the high yields on Greek debt, take the pressure off, and even make a bailout unnecessary. But the strategy has backfired. Mixed signals triggered greater uncertainty and pushed up the rates on Greek borrowing to unaffordable levels, increasing the chances of default.

Greece’s borrowing costs are now 3 to 4 percentage points higher than when EU leaders first pronounced on the crisis in February. This raises questions about the loans to Greece. An EU summit last month stipulated the credits be at market rates with no “subsidy elements”. But the €45bn is supposed to be made available at 5%, almost half the market rate. While the Greek government and European commission officials said that the key decisions had already been taken and that there was no doubt the Germans would write the biggest cheques, there are still battles to be fought.

Merkel has to get the rescue package through the German parliament, she may face a challenge in Germany’s supreme court and she is worried about losing votes in a crucial regional state election on May 9.

There will need to be a further meeting of the 16 single currency governments to sign off on the package by consensus, leaving anyone a veto.

It was not clear whether this would be at summit level or of finance ministers. “The government has not yet decided,” said Guido Westerwelle, the German foreign minister and leader of Merkel’s junior FDP coalition partner which is against the rescue package. “That means that a decision can go in different directions.”