The German parliament has voted by an overwhelming majority in favour of measures bolster the €440bn eurozone rescue fund, and give it new powers to buy bonds and recapitalise weak banks, in a move that lifted financial markets and boosted the euro.
The decision was greeted in Brussels as removing a big potential road block to further action to deal with the debt crisis, although several more eurozone parliaments still need to sign off on the package.
“It gives us some breathing space,” said a senior German official.
In European financial markets, Greek, Portuguese, Irish and Italian government bond yields tightened markedly, while the Eurofirst 300 index gained 0.6 per cent, led by Greek, Spanish and Italian companies. The euro rallied against most of the world’s major currencies, and set a one-week high versus the US dollar.
Deutsche Bank boosted sentiment further after it became the first European bank to issue senior unsecured debt for nearly three months, indicating that stresses in funding markets may be easing.
Officials in Berlin said the vote in the German Bundestag – by 523 votes to 85, with three abstentions – would strengthen the hand of the government, and revive confidence in Angela Merkel’s ruling centre-right coalition. They said it should also send a strong signal to eurozone partners that Germany was “ready to resume its responsibility” in the eurozone crisis.
The German chancellor managed to preserve her absolute majority in the Bundestag, although 15 of her supporters rebelled by voting against the package. The overall majority included support from both major opposition parties, the Social Democrats and Greens.
“Within the coalition, it is a very strong and comforting signal,” said a senior adviser. “But we are under no illusions that the next steps are just ahead, and they are going to be every bit as difficult.”
Jin Liquin, chairman of China’s sovereign wealth fund, CIC, told a conference in London: “We in China are concerned about the unravelling of the situation in the (euro) region”.
The measures to bolster the borrowing capacity of the European Financial Stability Facility, and give it new powers, including issuing liquidity loans to countries in difficulty, could well be tested in a matter of weeks, if not months, if market speculation about a possible Greek debt default comes true.
The so-called troika of officials from the International Monetary Fund, the European Commission and the European Central Bank, reopened talks in Athens yesterday on Greece’s progress in meeting its budget targets for its next €8bn tranche from the country’s ongoing €110bn rescue programme.
If they cannot reach agreement, not only will the payment be delayed, leaving Athens without enough cash in October to pay pensions, civil servants and interest on its debt, but it could lead to new negotiations on a second €109bn rescue package agreed by eurozone leaders in July.
Officials in Berlin are adamant that if there is a wider Greek financing gap, it cannot be filled with more public money, putting the onus on private creditors to take a bigger writedown on the value of their bonds.
In Athens, a government decision to cut 30,000 public sector jobs within two months to help cut its budget deficit ran into opposition opposition at an emergency cabinet meeting, adding to pressure on Evangelos Venizelo, finance minister.
Several eurozone member states are keen to review the terms of the bond rollover and bond buyback schemes agreed with international banks as part of the July package.
If there is any danger of Greece being forced to default, or reschedule its debts, eurozone governments are conscious that they must have the EFSF fully operational, with its bolstered finances and extra powers, in order to cope with the danger of contagion.
Many analysts are doubtful that even with a borrowing capacity up to the full €440bn, the EFSF – an intergovernmental institution that can only take decisions by unanimity – will be either large or flexible enough to counter a new bout of market speculation.
The German Bundestag vote will also require any such operations to get the approval of its budget committee.
Additional reporting by Robin Wigglesworth in London and Kerin Hope in Athens
Get alerts on European banks when a new story is published