UPDATE 1-Merkel pressured to rule out euro debt buybacks

Wed Feb 23, 2011 10:55am EST

Related Topics

* German coalition MPs agree non-binding resolution for ban

* Refers to permanent rescue fund to run from 2013

* Could affect EFSF, tie Merkel's hands at summit - analysts

(Recasts, updates with comment, background)

By Erik Kirschbaum and Sarah Marsh

BERLIN, Feb 23 (Reuters) - Germany's government will take note of domestic pressure to rule out bond buybacks by the euro zone's permanent rescue fund, signalling it could take a hard line in crunch talks on the crisis next month.

MPs from Chancellor Angela Merkel's Christian Democrats (CDU) and her coalition partners approved a motion on Tuesday, seeking to ban buybacks by the European Stabilisation Mechanism (ESM) when it replaces the temporary EFSF fund in 2013.

Though non-binding, government spokesman Christoph Steegmans told a news conference the resolution had been "closely-coordinated" with government officials.

"You can assume that there was close coordination between the parliamentary groups and members of the government," Steegmans. "And there will be (further coordination) as far as the further progress of negotiations in Europe are concerned."

Merkel has long been dragging her heels on agreeing to boost the scope and size of the bailout fund.

Fears of further election defeats in Germany, after her CDU party was routed in Hamburg at the weekend, has added to pressure for her not to underwrite the debts of the euro zone's struggling periphery.

While not explicitly ruling out buybacks under the EFSF -- an idea that is helping prop up debt markets -- the motion risks diluting what steps Germany is willing to consider on the crisis at a summit scheduled for March 24/25.

"In principle, there won't be any agreement on any rescue package without the explicit approval of Angela Merkel," said Kornelius Purps, fixed income strategist at Unicredit in Munich.

"If she sticks to guidelines set by her coalition partners last night there won't be an agreement on debt buybacks by the EFSF (either) or on common euro bonds."

Germany has already said it will only agree new measures if they come as part of a comprehensive package to solve the crisis -- code for indebted states taking aggressive steps to among other options cut back on public spending and cap wage growth.

Spanish Prime Minister Jose Luis Rodriguez Zapatero told Reuters on Tuesday he was confident Germany would support a strengthening of the euro zone fund despite Merkel's domestic problems. [nLDE71L0JE]

Portuguese and Spanish debt spreads against German Bunds were little changed on Wednesday.

"ONLY TRYING TO HELP"

The parliamentary motion, obtained by Reuters on Tuesday, recommends the German government rule out bond buybacks and not agree to any measures that could lead to a "transfer union". It will be submitted to a vote in the lower house of parliament on Friday. [ID:nBAT006023]

It sends the government a message that Merkel could ignore, but sources say she supports much of its content and will in any case need parliamentary backing for new euro zone aid measures.

"We want to strengthen the chancellor's position," said a parliamentary source.

FDP parliamentary group leader Birgit Homburger added: "The resolution is designed to give the government backing for the European negotiations because we know that the other EU countries have other viewpoints than we do."

Merkel has urged deputies to keep in mind that Germany cannot successfully push through all of its demands in talks with its 26 EU partners.

Bond buybacks are seen by markets and many euro zone countries as a key ingredient to any deal's success in getting on top of the region's year-long crisis.

But any perceived relaxation of debt terms for euro zone stragglers is a sensitive subject in a year of seven German state elections. In the first vote in Hamburg on Sunday, Merkel's CDU suffered their worst result since World War Two at the hands of the Social Democrats. [ID:nLDE71K1CL]

Some analysts were bewildered by the move.

"I don't think they've thought through the implications," said Thomas Mayer, chief economist at Deutsche Bank. "What do they want? It's not clear to me."

Mayer said that if Merkel feels bound by the resolution, the end result would most likely be to further burden the European Central Bank with the task of funding countries that cannot access the market.

Fabian Zuleeg, chief economist at the European Policy Centre think tank, said the resolution could leave Merkel's hands tied.

"I'd expect Merkel will want to keep a certain amount of flexibility in European negotiations, so I'm not sure how much influence this paper will have. Certainly it isn't helpful."

(Additional reporting by Andreas Rinke; Editing by John Stonestreet and Patrick Graham)

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