Her critics in the European Central Bank and in many European capitals had argued that any requirement that private investors absorb some losses risked plunging Greece into a disorderly default on its enormous debt.
But after a two-hour meeting with President Nicolas Sarkozy of France, whose banks are among the most heavily exposed in the Greek debt crisis, Mrs. Merkel relented, saying, “We would like to have a participation of private creditors on a voluntary basis.” She acknowledged, too, that there was no legal way of forcing banks to participate.
“This should be worked out jointly with the E.C.B,” she added, referring to the European Central Bank. “There shouldn’t be any dispute with the E.C.B. on this.” It was her second major political reversal in a month and could compound her political woes at home.
Mrs. Merkel spoke shortly after the embattled Greek prime minister, George Papandreou, reshuffled his cabinet after days of turbulence on the streets of Athens and within the political elite. In the most prominent change, he named Evangelos Venizelos, the former defense minister, as finance minister in place of George Papaconstantinou, who has been the highly visible face of the austerity drive.
Critics dismissed the change as cosmetic. Yanis Varoufakis, a political economist at the University of Athens, told Skai television that “not even God almighty” as finance minister could redeem the situation. Nevertheless, the combination of the cabinet changes and the agreement between France and Germany on Friday calmed jittery markets.
Behind most calculations about the Greek crisis lies the much broader worry about whether financial woes in Athens will lead to a domino collapse of other weak euro zone economies, such as those of Portugal and Ireland, and create a “credit event” similar to the one that froze global markets after the Lehman Brothers bankruptcy. To stave off an imminent default, Greece needs the next $16.8 billion installment of a $155 billion loan package it received a year ago. But Greece is also likely to need another longer-term bailout — estimated at up to $84 billion — before it can get its budget deficit, currently at 7.5 percent of gross domestic product, into a surplus.
The potential for European chaos is immense. The European Central Bank itself holds billions of euros in shaky Greek debt and has firmly opposed anything that could set off what rating agencies call a “credit event,” or default.
Officials with the European Union and the International Monetary Fund have expressed confidence that an agreement to release the next loan installment could emerge from a meeting of euro zone finance ministers on Sunday in Luxembourg, while the question of the proposed second rescue package could be put off until July. Mrs. Merkel’s retreat was all the more significant because German voters have registered loud concerns that their tax money, levied on a country known for prudence and restraint, is being used to spare Greece from the results of its own mismanagement and profligacy. With the demand for private lenders to be brought into the rescue, Mrs. Merkel had hoped to show German voters that the banks would share their pain.
The German leader also reversed her energy policies this month, moving up the deadline for Germany to close down most of its nuclear power stations to 2022. While she said publicly that her change of mind was a result of the nuclear disaster in Japan, many analysts saw it as a desperate attempt to recover political ground after a series of defeats in local elections.
Mrs. Merkel’s junior coalition partners, the Free Democrats, are also weak, leaving her bereft of powerful allies. “This coalition, as everyone knows, is an alliance for ill, not good,” The Süddeutsche Zeitung of Munich said in an editorial on Friday.
Article source: http://www.nytimes.com/2011/06/18/business/global/18euro.html?partner=rss&emc=rss