Merkel set to win Spanish aid vote despite rebels

BERLIN Wed Jul 18, 2012 6:09pm EDT

German Chancellor Angela Merkel addresses a news conference after talks with Thailand's Prime Minister Yingluck Shinawatra in Berlin, July 18, 2012. REUTERS/Tobias Schwarz

German Chancellor Angela Merkel addresses a news conference after talks with Thailand's Prime Minister Yingluck Shinawatra in Berlin, July 18, 2012.

Credit: Reuters/Tobias Schwarz

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BERLIN (Reuters) - German lawmakers look set to approve on Thursday Berlin's contribution to a euro zone aid package for Spain's ailing banks in a vote seen as a test of Chancellor Angela Merkel's authority within her centre-right coalition.

Merkel can count on broad opposition support to push the bill through the Bundestag, the lower house of parliament, but some members of her own coalition, nervous about the rising costs of the euro zone debt crisis for Germany, may rebel.

They are especially concerned that the Spanish banks, not the Spanish state, will be liable for the funds, increasing the risks for German and other euro zone taxpayers.

Germany, Europe's largest economy, is expected to guarantee about 30 percent of the total aid package, which is valued at up to 100 billion euros ($122 billion).

Merkel has expressed confidence about the outcome of the vote in the special Bundestag session. "From the signals I am hearing, I feel optimistic," she said on Wednesday.

Just over a year before the next federal election, Merkel is riding high in opinion polls thanks largely to her tough stance towards heavily indebted states in the euro zone crisis.

But some of her own conservatives and members of her coalition partner, the pro-business Free Democrats (FDP), fear she has given too much ground in allowing the euro zone bailout funds more flexibility to directly recapitalize banks in future.

A major rebellion within her own ranks would be an embarrassment for Merkel, who only needs a simple majority to get the law through but would prefer not to rely on opposition votes for such an important piece of legislation.

A leading member of her Christian Democrats (CDU), Norbert Barthle, said the aid package was needed to restore stability to Spain's economy, the fourth biggest in the euro zone.

"I'm convinced that what we are doing is necessary and right and in our own interest. It is necessary to stabilize the Spanish banking sector in order to keep the Spanish economy alive," he said.

"I am confident we will get a broad majority in the vote tomorrow. The question of liability is completely clear."

LIABILITY

Critics of the bill insist national governments should be liable for emergency loans granted to banks.

Under the temporary European Financial Stability Facility (EFSF) rescue fund, the vehicle initially used for Spanish aid, the Spanish state will indeed be liable.

But EU leaders have decided that, once the European Central Bank acquires new powers to supervise euro zone banks, and therefore can control how they operate, the bailout funds - the EFSF and its successor, the European Stability Mechanism (ESM) - will be able to lend to banks directly to recapitalize them.

Spain and other countries receiving bailouts favor granting the bailout funds such powers because this would break the vicious circle of indebted governments borrowing to prop up their banks and thus adding to their already heavy debt load.

Germany and other strong economies want adequate controls in place before agreeing to the changes.

Merkel is under heavy pressure from some EU partners to move more quickly to stem the crisis but must also heed limits set by German public opinion, parliament and the Constitutional Court, which has told the government to give lawmakers more say.

The court has now delayed the entry into force of the ESM, the permanent rescue fund, pending a detailed legal review of whether it violates the German constitution. The court is due to deliver its verdict only on September 12.

Finance Minister Wolfgang Schaeuble, who will open Thursday's debate at 1200 GMT, tried to reassure jittery coalition lawmakers, reiterating that any decision to recapitalize banks directly from the rescue fund could only happen once a central supervisory body was operating.

Even then it would have to be unanimously agreed by euro zone states and approved by the Bundestag, he told the Rheinische Post daily.

"The impression that has arisen through unclear and irresponsible comments from some individuals that we are now deciding on direct aid to banks without state liability is simply absurd. It is completely unfounded," he told the paper.

Merkel has tried to lower expectations, saying on Sunday she was not aiming to get the symbolically important so-called "chancellor majority" which would require the support of 311 of her coalition's 330 MPs in the 620-seat Bundestag.

In June, some 26 MPs from Merkel's coalition voted against a bill on the ESM, even more than the 17 coalition MPs who rebelled against the second Greek bailout package in February. (Writing by Gareth Jones; Editing by Tim Pearce)

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