Wolfgang Schaeuble the Salesman

When the Greek bailout extension deal got done, I mentioned that in the press conference that followed, German Finance Minister Wolfgang Schäuble made it clear he was looking to ‘sell’ the deal to the German parliament. And while he has been successful in doing so, recent evidence suggests that indeed he did have to work to make the deal viable. For me, this highlights the political constraints we are working under and reinforces my view that writedowns are not politically viable in Germany.

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When the Greek bailout extension deal got done, I mentioned that in the press conference that followed, German Finance Minister Wolfgang Schäuble made it clear he was looking to ‘sell’ the deal to the German parliament. And while he has been successful in doing so, recent evidence suggests that indeed he did have to work to make the deal viable. For me, this highlights the political constraints we are working under and reinforces my view that writedowns are not politically viable in Germany.

Here’s what I was saying on 21 February after the deal got done:

“Syriza will have to sell this deal as a bridge to the sustainable economic outcome it sold to its electorate in the January elections. At the same time, the Germans and the Finns at a minimum will have to sell this deal to their parliaments for it to work.”

I also texted Schäuble’s remarks during his press conference:

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“We are doing our utmost to convince the Bundestag.”

Now the Finns did not have to take the deal through parliament because the Prime Minister said it was within the executive branch’s mandate to decide whether the deal was a go. But Prime Minister Stubb still had to ‘sell’ the deal or face a vote of no confidence, which would bring his government down.

In Germany, Reuters has the goods on what went down:

German Chancellor Angela Merkel narrowly averted a far bigger rebellion last month on Greece’s bailout extension among her conservatives, many more of whom would have voted ‘Nein’ but for her finance minister’s powers of persuasion, lawmakers said.

Germany’s parliament voted on Feb. 27 to extend Greece’s bailout by four months, but a record number of conservative dissenters were not convinced that Athens would deliver the economic reforms it has promised.

One senior conservative told Reuters that Merkel’s Bavarian allies, the Christian Social Union (CSU), “would have unanimously voted ‘No'” had Wolfgang Schaeuble not solicited support during a personal appearance two days before the vote.

Another leading conservative said Schaeuble’s meeting with Merkel’s Christian Democrats (CDU) was equally important in securing their support at a time when confidence in the Greek government was “kaputt” in the lower house of parliament.

“The vote was hanging by a thread,” the lawmaker said, on condition of anonymity.

Schaeuble is a leading advocate of the austerity measures that Greece’s new left-wing government wants to scrap.

The lawmakers’ comments point to a growing groundswell of discontent within conservative ranks and suggests there is a risk they would not be prepared to approve a third bailout for Greece if Athens asks for more help in future from its partners.

“The Greeks say ‘We don’t need a third bailout’ – but they also said they wouldn’t need this bailout extension,” said the conservative lawmaker.

In the last vote, 29 of the 32 parliamentarians who voted against an extension for Greece came from Merkel’s CDU and the CSU. In addition, 118 conservatives who voted “yes” gave personal statements signalling they would not keep toeing the party’s current line unless there was a significant change.

The takeaway here is that we are seeing serious bailout fatigue. It may seem like Wolfgang Schäuble is working against the Greeks by making inflammatory statements. The reality, however, is that he has domestic political issues to contend with. And he needs to make sure that whatever the German government does is seen in a favourable light given the domestic constraints. I think we are going to have a problem then if Greece wants more i.e. a reduction in the net present value of its debt via a derivatives structure like GDP-linked bonds or writedowns. It makes sense to get that reduction because the debt burden is unsustainable. But it is not politically viable in Germany right now, in my view. We could see a default as a result. And that does not necessarily mean Grexit. A politically acceptable outcome is Greece negotiating for NPV reduction, the Germans saying no and Greece defaulting and staying within the eurozone. Greece can say we fought for what was right and Germany can say they did not allow the Greeks to get off lightly; the Greeks simply reneged on their obligations. This is an outcome that is politically viable and one I think has a high likelihood of occurring.

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