Merkel rules out sovereign default in euro zone before 2013


GREECE CAME under fresh pressure from its euro zone sponsors yesterday over the lack of progress in its troubled bailout, as German chancellor Angela Merkel ruled out any sovereign default in the euro zone before 2013.

A meeting of euro zone finance ministers in Brussels was overshadowed by sex attack charges in New York against IMF chief Dominique Strauss-Kahn, who had been due to attend.

Amid anxiety over the potential of the case to destabilise their efforts to contain the sovereign debt crisis, the IMF sent deputy managing director Nemat Shafik to attend the meeting in his place.

The ministers signed off on Portugal’s €78 billion bailout, the euro zone’s third after Greece and Ireland.

They also discussed the nomination of Italian Central Bank governor Mario Draghi to succeed European Central Bank president Jean-Claude Trichet. No other candidate is in the frame for the post.

Also at issue was the technical operation of the European Stability Mechanism (ESM), the permanent euro zone bailout fund due to come into force in mid-2013.

As ministers prepared to tackle the increasingly precarious financial situation in Greece, Dr Merkel made clear her resistance to any debt restructuring by the country.

Addressing students in Berlin, Dr Merkel said private sovereign creditors should not bear losses until the ESM starts its work.

“It would raise incredible doubts of our credibility if we simply were to change the rules in the middle of the first programme,” Dr Merkel said.

The chancellor’s intervention unambiguously reinforces the public stance adopted by euro group chief Jean-Claude Juncker and the European Central Bank.

However, Dutch minister Jan Kees De Jager said “all kinds of topics”, including restructuring, remained under discussion. He added: “In public we are very reluctant about discussing and debating restructuring.”

The Brussels talks come as the EU authorities brace for a second Greek aid plan to help Athens overcome a financing shortfall in its bailout next year.

The Greek government’s lack of progress in the overhaul of its economy has angered euro zone lenders. A new loan package is increasingly likely, with a sum of €60 billion mentioned in some quarters.

However, Mr De Jager insisted there was no current need for additional external aid.

“At the moment it seems that Greece is not on the right track. It must first be brought on the right track before any other decision is contemplated.”

Austrian minister Maria Fekter said Greece had “huge privatisation potential”. The country should help itself before seeking additional aid.

“We’re in favour of the deadline of the Greek package being extended, giving them more time, but the money should only be made available when the structural reforms are clearly on the right track.”

As they backed the Portuguese rescue, the finance ministers called on “all political parties” in that country to ensure a rigorous and swift execution of the reform plan.

This reflects lingering concern that the victors of next month’s general election might seek to dilute the programme.

The talks on the ESM reflect concern to ensure its smooth introduction once the temporary European Financial Stability Facility fund expires in May 2013.

EU leaders have resolved that private sovereign debt investors should bear compulsory losses as a condition of any bailout by the ESM.

They also want the ESM to have preferred creditor status in any rescue, meaning private creditors would be first in line to bear losses.

This has fanned tension in debt markets as investors take stock of the threat to their exposure to the euro zone’s three bailout recipients and other heavily-indebted single currency countries.