Softening stance on Greece, Merkel rules out default

Mon Oct 15, 2012 11:36am EDT
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By Noah Barkin

BERLIN (Reuters) - Chancellor Angela Merkel has ruled out letting Greece default on its debt, in the latest sign Berlin is softening its stance towards Athens ahead of an eagerly awaited report on its reform progress from the "troika" of international lenders.

The German leader signaled that she would be taking a more conciliatory approach towards Greece by visiting the country last week for the first time since the euro zone crisis erupted there three years ago.

And over the weekend, comments by several conservative allies of the chancellor provided further evidence that the government has embarked on a delicate policy pirouette.

Finance Minister Wolfgang Schaeuble, one of Greece's harshest critics, told a meeting of business leaders in Singapore on Sunday that the country would not go bankrupt - an acknowledgement that Athens will get the 31.5 billion euro ($41 billion) aid tranche it needs next month to avert a default.

Merkel told a news conference with Panama's president on Monday that she was in total agreement with Schaeuble, and explicitly ruled out any steps - including a Greek insolvency or euro zone exit - that might unleash "uncontrollable developments" in the single currency bloc.

The change in tone, which helped push down Greek bond yields to their lowest levels in over a year, reflects a reassessment by Merkel of the costs and benefits of her tough public stance towards the euro zone's most vulnerable member.

The hard line served two main purposes: it ensured that reform pressure on Greek Prime Minister Antonis Samaras remained high, and it convinced skeptical conservative allies of Merkel in parliament to support her.

Now the calculation has changed. With a U.S. election less than a month away and a German vote due one year from now, reducing the risk of turmoil has become the top priority, even if it complicates Merkel's domestic dance.   Continued...

German Chancellor Angela Merkel and Panama's President Ricardo Martinelli arrive for a news conference after talks in Berlin, October 15, 2012. REUTERS/Tobias Schwarz