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Busch: 2010 German Bailout Vote=2008 Congress TARP Vote

While the EU/IMF/ECB continuing to work towards an agreement on Greece, my thoughts turn to the voting that will occur next week in Germany.

As most know, the German voter is not happy with having to support Greek pensions that start 2 years before Germans can retire.

This is why PM Merkel wanted to delay voting on a debt plan until after the May 9th North Rhine-Westphalia state elections. She also didn’t want to have voters confront the issue that Germany has not reduced their own spending as she promised.

As a matter of fact, the German government in March approved the highest package of new debt in the history of postwar Germany at E80.2 billion.

As Der Spiegel points out, this means:

  • The German federal budget for 2010 will be close to €320 billion, but only three-quarters of that money will be financed through government revenues;
  • Per capita, that translates into a further €1,000 in debt for every resident of Germany;
  • 11.5 percent of the federal budget will go towards interest payments on debt.

Into this fiscal stew, German politicians have to vote next week on adding more spending and debt to the German burden because of Greece. It’s assumed that Germany will have to supply E8.4 billion in credit guarantees for Greece this year. However, Germany may be on the hook for up to E20 billion more in a larger package of E120 billion that is being discussed.

This request for aid with a subsequent vote reminds me of similar situation in 2008: the TARP vote by Congress.

Debtor Nations
Debtor Nations

If you remember, the original TARP was seen as the ultimate panacea for what troubled the US financial system.

The original draft by Paulson and Bernanke was just 3 pages long. It went through several changes, but the initial vote defeated the TARP bill on September 29th. Subsequently, the bill was revised and then approved.

However, the stock market dropped 8.5% on this day after the rejection. In a risk-off move, the US dollar strengthened 300 points against the Euro on that day.

A similar scenario can be brewing for next week in the German Bundestag. The parliament must bring up and approve the Greek bailout money next week. The process should be highly contentious and create market uncertainty of approval. I expect this fight/pessimism to occur by mid-week. The major risk is that this is not a one week process and may be dragged out for another week similar to what Congress did in 2008.

Finance ministers want the Greek bailout wrapped up by the May 10th European Union summit so that funds can reach Greece by their May 19th refunding. The German vote next week will be critical and it’s not a done deal. While I expect a deal to be eventually done and led by the IMF, the process of getting there will be ugly German political sausage making. Bratwurst at its best!

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Andrew B. Busch Director,Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter at http://twitter.com/abusch .

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