German parliament backs expanded euro rescue fund

Written by Bloomberg | Updated: Sep 30 2011, 08:23am hrs
German lawmakers approved an expansion of the euro-area rescue funds firepower, freeing the way for European officials to focus on what next steps may be needed to stem the debt crisis.

The lower house of parliament passed the measure with 523 votes in favour and 85 against, granting the fund powers to buy bonds in secondary markets, enable bank recapitalizations and offer precautionary credit lines. It raises Germanys guarantees to 211 billion euros ($287 billion) from 123 billion euros. The main opposition Social Democrats and Greens said before Thursdays session in Berlin that theyd vote with Chancellor Angela Merkels government, assuring passage.

The bills passage by Europes biggest economy allows euro- area officials to weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks. Options include seeking further writedowns on Greek sovereign bonds, adding yet more firepower to the rescue fund and a plan to protect banks.

Beefing up the fund bolsters defences against the crisis, setting the stage for German policy makers to focus on Greeces second bailout, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co in London. That may morph into a debate about an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalisation of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support for Greece, he said.

Faced with German voter dismay at bailouts, coalition members wary of granting more aid threatened to rebel against the government line. The risk of defeat receded as international concern grew that default by Greece would harm the euro regions core countries and tip the global economy back into recession.

The German parliament is voting for too little, too late, Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone before the ballot. Merkel cant possibly believe this is the final point in a rescue package that will calm global markets and lead us out of the crisis.

Additional measures now in play include further leveraging the rescue fund, bringing forward the start of its permanent successor by a year or more; reopening the second Greek rescue agreed in July.