Germany Softens on Greece

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German Chancellor Angela Merkel

German Chancellor Angela Merkel has certainly changed her tune.

Until very recently Merkel and her finance minister had been demanding that "private creditors" be required to "participate" in any restructuring of Greece's debt. That was code for banks and other bond holders being required to take haircuts, either by reducing the amounts they were due or extending the term of the loans.

Now she's warning about the exposure of European financial institutions to credit default swaps that insure Greek bonds.

"Nobody around the globe knows exactly who holds those papers and what it means if they come due," Merkel said in a meeting of the German parliament's European affairs committee. According to the Associated Press, Merkel also warned that it was also unclear "who will have to pay how much and who will need fresh capital in what way."

Part of the change of message was no doubt political. When Merkel says it is unclear who will have to pay up if there is a credit event triggering the swaps, she's saying to the German ministers (many of whom are reluctant to support a bailout): "Look, fellas, this could be us on the line. Our banks, our insurance companies. Stop thinking of this as a bailout of those lazy, spendthrift Greeks. If we let Greece go down, we have to worry about our banks."

Merkel's newfound interest in derivatives exposure really makes it sound as if she's recently had one of those "come to Jesus" moments.

Someone in German finance, very possible Deutsche Bank head Josef Ackermann, may have explained to Merkel that the Greek debt situation was much more complicated than just asking "who owns those Greek bonds." This person would have explained that the owners of the bonds, in many cases, would not take the first losses from a default. The sellers of protection on the bonds would.

Think Henry Paulson coming to George Bush explaining that allowing "the market" to sort out the mess following the collapse of Lehman Brothers would mean risking another Great Depression. Bush still says that he's a "market guy" who doesn't like the idea of bailing out failed companies. But when it come down to it, he trusted his advisers. As he saw it, they knew far more about this stuff than he did.

So did someone get to Merkel? Most likely. And at some point, we'll learn the details of who, what, when and where.

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