In order for a deal on Greece to be agreed, Germany dropped its demand for restructuring of Greek debt and some pain for private bond holders.
It therefore surprised many when Wolfgang Schaeuble made a U-turn and told euro group finance ministers that his government would be aiming at a "soft restructuring," which could include seven year maturity extensions last week.
The about turn is all about German domestic politics according to Frank Engels, the senior European economist at Barclays Capital in Frankfurt. With resistance growing within the parliamentary factions of the government, parties and politicians are demanding more say about such rescue packages.
“MPs feel increasingly uncomfortable to have the (German) taxpayers footing the bill for the rescue program(s) exclusively - i.e. without any private sector burden-sharing,” Engels wrote in a research note.
“Domestic political pressures are behind this political U-turn that has brought the German government on a likely confrontation course with the ECB and in particular the French government, both of which in the past offered stiff resistance to any such plans for private sector burden-sharing that would exceed a voluntary roll-over along the lines of the Vienna Initiative,” he said.
The Vienna Initiative was an agreement reached in 2009 between Western banks and governments in some Eastern European countries that the banks will keep their money in those countries instead of returning funds to parent companies, while local central banks will offer liquidity support.
Tough Battle Ahead
With the ECB against any restructuring of Greek debt, German domestic opinion is - following a vote in favor of the bailout with conditions on burden sharing - set to force a battle over what to do next.
“The German government will have to weigh carefully future domestic political problems in relation to the EFSF and ESM against problems that might arise now from the clash of views with the ECB, France and probably other euro area member countries when it comes to the ongoing negotiations of financial rescue package for Greece,” said Engels.
On Friday the ECB press department made it clear how they view the matter following one of their own going off message.
A statement went out following these comments from Vice President Vitor Constancio following Jean-Claude Trichet’s monthly press conference.
"The president excluded many things yesterday but he did not say that he had excluded extensions of maturities. What he did say is that he excluded a scheme that could lead to a credit event or selective default.”
The ECB correction made it clear they will not be happy with the new German position.
"President Trichet made clear that the ECB's Governing Council excludes all concepts that are not purely voluntary or have any element of compulsion, that entail any credit event or that entail any default or selective default,” it said in a statement later.
Given the sensitivity on the issue at the ECB it is clear that tensions could rise as we get closer to next week’s heads of state summit in Brussels at which the new Greek deal is likely to top the agenda.