Tension Over Aid to Greece Could Unsettle Markets

While the Greek prime minister, Antonis Samaras, will be greeted with military honors when he arrives in Berlin on Friday, his pleas for easier bailout terms could meet with a cool reception, setting up tension that could unsettle the financial markets next week.

Leader of the New Democracy conservatives, Antonis Samaras
Louisa Gouliamaki | AFP | Getty Images
Leader of the New Democracy conservatives, Antonis Samaras

Their summer vacations over, European political leaders appear to have resumed the maneuvering that has so often caused market turmoil and frustrated outsiders hoping for a quick solution to the euro zone debt crisis.

Mr. Samaras, who leads a fragile coalition, is under intense political pressure at home to provide relief from the austerity that has made life tough for many Greeks. Amid continuous political turmoil and depression like economic conditions, Greece has not been able to meet the timetable to get government spending under control or carry out changes intended to improve tax collection and create a better climate for business.

During a week that will take him to Berlin and Paris, Mr. Samaras is expected to ask for a two-year extension for Greece to meet its budgetary and reform commitments. He is scheduled to meet with Angela Merkel, the German chancellor, on Friday, and François Hollande, the president of France, on Saturday.

In addition, Jean-Claude Juncker, the prime minister of Luxembourg and head of the Eurogroup of 17 euro zone finance ministers, will meet Mr. Samaras in Athens on Wednesday.

But top German officials signaled that Greece could face opposition in its bid for concessions. Wolfgang Schäuble, the German finance minister, expressed reluctance to grant more aid to Greece.

“It is not responsible to throw money into a bottomless pit,” Mr. Schäuble said in Berlin on Saturday, Reuters reported. “We cannot create yet another new program.”

Volker Kauder, a top official of Ms. Merkel’s Christian Democrat party, echoed his concerns. Mr. Kauder told the magazine Der Spiegel that German lawmakers were unwilling to give Greece more time to meet commitments, or to ease the terms.

“Sooner or later,” said Mr. Kauder, the leader of the Christian Democrat delegation in Parliament, the Greeks “must answer the question: should we maybe try a little harder, or should we leave the euro?”

After a brief quiet period in recent weeks as most political leaders went on vacation, the euro zone faces several crucial events that could determine whether the common currency survives.

This week, there will be meetings of top leaders with the objective of overcoming German reluctance to aid Greece and other debt-ridden countries like Spain. On Monday, Dimitris Avramopoulos, the Greek foreign minister, will meet his counterpart in Berlin, Guido Westerwelle. Mr. Hollande will visit Ms. Merkel in Berlin on Thursday, and is likely to urge her to allow concessions for Greece.

German officials have a history of talking tough before such meetings as a negotiating tactic, and in practice have often been more flexible than their rhetoric implies. Despite regular pronouncements that the euro zone could survive Greece’s exit, political leaders in Berlin and elsewhere are unlikely to want to take such an enormous risk.

Last week, Ms. Merkel sounded relatively conciliatory. “European heads of government also feel a duty and have a duty to do everything possible to preserve the common currency,” she said during a visit to Canada.

In contrast to many others in her own party, Ms. Merkel suggested she is open to aggressive bond buying by the European Union rescue fund and the European Central Bank, in order to control borrowing costs for countries like Spain and Italy. If markets demand interest rates that are too high, Spain and Italy might have trouble refinancing their debt and eventually be forced to default.

European stock markets have risen in recent weeks, amid expectations that the central bank and European governments were becoming more willing to attack the debt crisis aggressively.

Financial markets remain focused on how the central bank might actually go about intervening in government bond markets. Mario Draghi, the president of the central bank, said this month that the bank was willing to take action in bond markets but gave little detail about what strategy it would use to try to tame the market. The bank’s governing council will hold its next monetary policy meeting on Sept. 6.

Adding to the tension, Germany’s constitutional court is scheduled to rule Sept. 12 on whether the government acted lawfully when it committed to the European Union rescue fund, known as the European Stability Mechanism. The court is not expected to block Germany’s participation, but could impose conditions that make European decision making more cumbersome than it already is.

Spain’s troubled banking system is another unresolved problem. European leaders have approved 100 billion euros (about $123 billion) to rebuild the reserves of Spanish banks. But Spanish leaders have not yet formally requested the money, and it is unclear how the funds will be disbursed. Some economists fear that a string of bank failures could further undermine the European economy, and make it extremely difficult for the common currency to survive.