ECB president Jean-Claude Trichet is without a doubt having another hissy-fit today as Germany Seeks Extending Greek Maturities

German Finance Minister Wolfgang Schaeuble said bondholders must contribute a “substantial” share of a second aid package for Greece, proposing a swap that credit-rating companies may term a default.

Schaeuble told European Central Bank President Jean-Claude Trichet and fellow euro finance ministers in a June 6 letter that maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy.

The German position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area’s first sovereign default. A swap offering investors terms that are “worse” than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said this week.

“Either Schaeuble softens his calls or the ECB makes further concessions,” said Christopher Rieger, head of fixed- income strategy at Commerzbank AG in Frankfurt.

With a return to capital markets in 2012 “more than unrealistic,” Greece needs more aid to avert “the real risk of the first unorderly default within the euro zone,” Schaeuble wrote.

While the size of the package can’t be assessed until the so-called troika of officials from the International Monetary Fund, ECB and European Commission give a progress report on Greece, it is likely to be “substantial” and must “involve a fair burden sharing between taxpayers and private investors,” Schaeuble said.

How Long Can Papandreou Last?

Greek Prime Minister George Papandreou’s socialist party holds 156 seats in the 300-seat Parliament. How long can that last?

Irish and Portuguese prime ministers went down in flames over bailout proposals, and the Spanish prime minister bowed out of the next election. It’s just a matter of time before Papandreou bites the dust as well.

Please consider Papandreou Faces Growing Backlash as Last EU Bailout Premier

George Papandreou is the last man standing among the euro-area leaders who needed a handout after Jose Socrates’s defeat in Portuguese elections yesterday.

For Papandreou and the investors and taxpayers who will share the cost of a beefed-up bailout for Greece, questions are increasing about whether he will complete a term that runs until 2013 and enact the budget reductions and asset sales that his benefactors demand.

The Greek premier, who has won assurances that international lenders will make the next payment of last year’s 110 billion-euro ($161 billion) rescue, will aim to quell growing dissent this week within his Socialist party — known as Pasok — over deeper austerity measures as voters’ patience wears thin and public protests mount.

“The coming week may well test the seams of Pasok in parliament and could prove a challenge too much for Papandreou,” said Jens Bastian, a visiting economist at St. Antony’s College, Oxford University in England. “It is a make or break situation for his leadership of the party and the government.”

“Even if he gets the medium-term economic plan through parliament, the political turmoil is likely to continue as a second bailout will also require a parliamentary vote,” said Wolfango Piccoli, a London-based analyst at the Eurasia Group, which monitors political risk. Piccoli said he expected Papandreou to clinch a vote on the fiscal plan as “a no-vote would be suicidal for both Greece and the ruling party.”

Demonstrations modeled on the Spanish “Idignants” protests have drawn crowds to the central Syntagma Square in Athens each night since May 25. Shouting “thieves, thieves” at the Parliament building and banging pots and pans, protesters have set up camp in the square and hold ”popular assemblies” every evening. One group is collecting signatures for an anti- government referendum.

At least 50,000 people gathered last night, the police estimated, the largest turnout to date. That compares with the 1,500 people who responded to a call by the country’s two biggest unions to rally on June 4.

The “Big Kahuna”

All this fuss over Greece is amusing given Spain and Italy are the “Big Kahunas”.

I expect the market at any time to lose confidence in Spain. For the time being, yields are consolidating at the upper end of the range as show in the following chart of Spanish 10-year government bond yields.

If you really want to watch a hissy-fit from Trichet, just wait until Spain blows.

Mike “Mish” Shedlock
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