The feud between ECB president Jean-Claude Trichet and German finance Minister Wolfgang Schaeuble escalated in a major way today with members of German Parliament siding with Schaeuble and against the wishes of the ECB.

German Politicians Demand Private Creditors Participate

Please consider Germany MPs discuss resolution on Greece aid

German members of parliament are discussing on Thursday a joint motion for a resolution demanding the fair participation of private creditors in future aid to Greece, a draft of the paper obtained by Reuters said.

The deputies from all three parties in Chancellor Angela Merkel’s center-right coalition are demanding to have a say in agreements for new aid packages, the resolution said.

“The German parliament urges the government to only agree to new financial aid for Greece if an appropriate participation of private creditors has been introduced,” the document said.

“That way Greece’s ability to carry its debt and so that a fair distribution between public and private sides can be reached.”

The document is not binding for the German government, but can be seen as a guideline for its leaders when they enter negotiations with other EU leaders.

Merkel in No-Win Position

Chancellor Angela Merkel better get behind her party before what’s left of it splinters to smithereens.

She made a huge mistake and I called her on it at the time, by giving into Trichet. She may not have a choice now and may be in a “heads she loses, tails she loses situation”.

Trichet Throws Another Hissy-Fit

As expected from the above details, Trichet went into another hissy-fit, insisting that he, not the markets, not voters, not the German parliament knows what’s best for the EU.

Please consider Trichet Escalates Greece Clash as ECB Puts Onus on Governments for Rescue

Germany stepped up demands that investors share the cost of a second Greek rescue after Jean- Claude Trichet rejected direct involvement by the European Central Bank.

“We have to insist on the participation of the private sector,” German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today, ignoring warnings from credit-rating firms that his proposal to extend Greek debt maturities by seven years would be deemed a default. A working group set up this week is charged with indentifying “a good solution for the involvement of the private sector that can and has to be supported by the European Central Bank,” he said.

Greek, Irish and Spanish benchmark bonds slumped after Schaeuble’s speech. Portugal’s 10-year bond yield rose to a record 10.45 percent before settling up 13 basis points at 10.42 percent as of 12:17 p.m. in London. Greece’s 10-year yield rose 12 basis points to 16.78 percent.

The cost of insuring against default on government debt sold by Greece surged to a record yesterday, according to traders of credit-default swaps. Contracts on Greece soared 30 basis points to 1,522, according to CMA.

Sustained ECB resistance could leave politicians facing the prospect of asking their taxpayers to finance a Greek budget shortfall that may amount to 90 billion euros ($130 billion) through 2014. Trichet also warned against Schaeuble’s approach, saying any solution forcing private-sector involvement amounts to a “credit event” and would be an “enormous mistake.”

“Trichet is really digging his heels in now,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London who worked at the ECB until April.

Schaeuble, in a June 6 letter to Trichet and fellow euro finance ministers, called for Greek bondholders to extend the maturities of their debt by seven years to give Greece more time to cut its debt and budget deficit.

“I have proposed a fair distribution of risks between taxpayers and private creditors for the phase of gaining time,” Schaeuble said today. “We’re taking skeptical voices and warnings from the European Central Bank on the involvement of the private sector seriously.”

Credit Markets – A Gathering Storm”

Trichet says haircuts are OK as long as private participation is “voluntary”. Does the construct “voluntary” participation even exist?

Pater Tenebrarum on the Acting Man blog tackles that question and much more in his post Credit Markets – A Gathering Storm

Note the French demand that any participation of private creditors has to be ‘voluntary’. How is such ‘voluntary participation’ going to be negotiated before the looming deadline on June 20? It is simply impossible. As we have noted before, Moody’s and Fitch both have already let it be known that they will not consider such an agreement to be ‘voluntary’ – and that creates a considerable stumbling block, as the ECB likewise insists that any haircut to private creditors arrived at by compulsion will be deemed unacceptable.

It should be perfectly clear that any private creditor participation – as desirable and necessary as it surely is – can not be considered ‘voluntary’ if it is based on ‘resolutions’ issued by national parliaments or governments. This is a catch-22 situation that seems intractable.

Moreover, another potential stumbling block to the EU’s bailout policies is slowly but surely taking shape in Germany – the German Constitutional Court in Karlsruhe is beginning to hear arguments in the constitutional challenges to the aid package raised by several prominent economists and politicians. Although the court has proved pliable in the past and has tended to side with the German government’s line in EU related questions, we would submit that there is no guarantee this will continue.

Clearly, if the judges were to resort to a strict interpretation of Germany’s constitution and how it relates to the Lisbon treaty’s obligations and rights which were already once modified due to an earlier court ruling (this was the first bone the court threw to euro-skeptics, see articles Mr. Gauweiler’s Challenge and Gauweiler’s challenge – an update), the court would not be able to dismiss the challenges entirely. More likely it would have to issue a directive asking the government to once again renegotiate the requisite passages of the Lisbon treaty. If this were coupled with a temporary injunction against further disbursements to the EFSF, the entire bailout scheme would immediately collapse.

Another Court Challenge Coming Up

With thanks to Acting Man please consider this translation of Karlsruhe verhandelt über Klage gegen EU-Rettungsschirm

“The federal constitutional court will hear oral arguments in the challenges against the euro ‘rescue umbrella’ as well as the aid to Greece on July 5. This was announced by the court on Thursday. The federal government will have to explain to the court how the measures to stabilize the euro currency accord with the constitution and European law. Originally the second senate considered a trial in camera [a non-public trial, ed.]. However, this view appears to have changed in the course of recent deliberations. One must expect a fundamental decision, for instance regarding the budgetary rights of parliament. Plaintiff is a group around the euro-skeptic Joachim Starbatty. In Starbatty’s view, the aid program is not compatible with the EU treaties [he’s right, ed.]. The plaintiffs fear that the EU is going to develop into a fiscal and transfer union in the long term [right again, ed.]. In the framework of the rescue package, Germany can issue credit guarantees for euro area member nations in the amount of up to € 148 billion. Overall, the size of the rescue package amounts to € 750 billion. It is designed to dissuade financial markets for further speculation on national bankruptcies within the euro area [hasn’t worked so far, ed.].”

Finland Support for Bailout in Jeopardy

Also via Acting Man, please consider Katainen Turns to Euro-Skeptics Amid Impasse

Finland’s inability to form a government almost two months after elections is forcing the head of coalition talks to return to bailout-skeptic parties as he approaches a June 10 deadline for reaching an agreement.

“I will try to find a new basis for the government by Friday,” Jyrki Katainen, who as leader of the biggest party since April 17 elections is heading government talks, said in an interview in Helsinki yesterday. “I’ll talk with everybody and I’ll try to find a majority government. It’s impossible to say right now what will be the outcome.”

The stalemate comes after Katainen last month ensured parliament approved a bailout for Portugal before starting coalition talks, a move he pushed through to prevent the euro- skeptic True Finns from blocking a rescue. His failure since to secure majority backing in coalition talks means it’s now an “open question” whether Finland can support additional aid to Greece, Katainen said.

The deadlock was “inevitable,” True Finns leader Timo Soini said in an interview yesterday. “The negotiations have failed two times.” Katainen “has one more chance,” he said.

If Katainen fails to find a majority, Social Democrat leader Jutta Urpilainen will head a new round of talks, after her party came second in the April elections. The Social Democrats, while backing Portugal’s rescue package, have said they want bondholders to share losses and are calling for asset sales and other conditions for any future aid.

Greek Prime Minister May Face Revolt

The Irish Times reports Greek prime minister may face revolt

Greek prime minister George Papandreou will tomorrow strive to stem an outbreak of unrest in his party over the social cost of a new bailout after data laid bare the depth of the country’s economic crisis.

Discontent in the ruling Socialist party (Pasok) could yet spill over into a full-scale parliamentary rebellion and tens of thousands are protesting regularly in central Athens against waves of austerity demanded by the European Union and IMF, as well as corruption and state mismanagement.

Labour minister Louka Katseli said Pasok deputies wanted to know whether the sacrifices Greeks have made under the original 110 billion euro bailout, agreed with the EU and IMF a year ago, were bearing any fruit. “The deputies are demanding that the burden should be shifted to those who can withstand it better,” she told Mega TV.

Until now dissent has been muted among the ruling Socialists. But Greeks have staged nightly protests for a fortnight in the capital’s Syntagma Square to hurl abuse at the parliament building, with numbers hitting over 80,000 on Sunday.

Many Pasok backbench members of parliament appear to be taking fright.

Open Revolt Against Trichet

The actions in Germany by finance minister Schaeuble and the German parliament, and in Finland by the Social Democrats and the True Finns constitute an open revolt against Trichet.

Note too that Greek Prime Minister George Papandreou is another one who insists there will be no haircuts on Greek Bonds. The reason is Greek pension plans are stuffed to the gills with them.

Tough luck says Finland, the German finance minister, and now the German Parliament. How will that fly with Greek unions and Papandreou.

German courts will be icing on the cake, assuming this whole deal does not come flying apart before the German courts rule on it. Next week may be a disaster unless there is a major “mind meld” over the weekend. Don’t count on it.

Mike “Mish” Shedlock
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