The day the austerity died

Can we save Greece again? Is there hope? At the last minute Germany seemed to blink! The New York Times reported that, “Chancellor Angela Merkel and the French President Nicolas Sarkozy announced the agreement after a two-hour meeting in Berlin. “We would like to have a participation of private creditors on a voluntary basis,” Mrs. Merkel said at joint news conference with Mr. Sarkozy. “This should be worked out jointly with the E.C.B.,” she added. “There shouldn't be any dispute with the E.C.B. on this.” “This is a breakthrough,” Mr. Sarkozy said, referring to the softening of the German position.

European stock markets turned positive on the news and The Euro strengthened against the dollar, reversing its earlier decline. The European Central Bank - which itself holds billions of shaky Greek debt - has firmly opposed anything that could trigger what rating agencies call a “credit event,” or default. Mario Draghi, who has been nominated to succeed Jean-Claude Trichet as bank president, testified on Tuesday that the bank could only accept including bondholders if it were “entirely voluntary.” One acceptable option, he indicated, is known as the Vienna Initiative, after a 2009 agreement under which international lenders agreed to roll over credit lines and maintain their exposure to Central and East European countries to carry them through the global financial crisis.

On Friday, Mrs. Merkel said the Vienna Initiative was a “good basis” for a solution. Mr. Sarkozy agreed. But neither gave details about how the private investors would work with the International Monetary Fund and the E.C.B. They said they were waiting for the troika - the I.M.F., the E.C.B and the European Commission - to present its latest report on Greece’s situation. Amid suggestions that Germany was pushing to delay a decision on the second rescue until September, Mrs. Merkel said she wanted “a solution as quickly as possible,” and hoped the new package would be decided by next month. Mrs. Merkel, who has been weakened politically by a series of local election defeats, now faces the potential for a rebellion in her center-right coalition over the concession.

Lawmakers from her Christian Democratic Union party and from her coalition partners, the Free Democrats, who are increasingly euro-skeptic, are staunchly opposed to the taxpayer alone bailing out Greece again. Like-minded countries that have backed Mrs. Merkel and her finance minister, Wolfgang Schäuble, including the Netherlands, Austria and Finland, could also still protest.

On the other side, countries like France, whose banks are the most exposed to Greece, and the E.C.B., which has been a buyer of last resort for Greek sovereign debt, are afraid of anything that smacks of default. Such a “credit event” could lead to damaging losses for banks and a freezing up of the global credit markets, such as followed the Lehman bankruptcy in 2008. To stave off an imminent default, Greece needs to get the next installment of the €110 billion, or $155 billion, loan package it received a year ago released soon. That amounts to €12 billion.

Further out, Greece is going to need another bailout - estimated at up to €60 billion - because it won’t be able to return to the markets next year as initially planned. E.U. and I.M.F. officials have expressed confidence that an agreement to release the €12 billion could be made at a meeting of euro group finance ministers on Sunday night in Luxembourg, while the question of a second rescue package could be put off until July.

But politically, any new rescue package depends on Greece pushing through additional savings to close a widening budget gap, a demand that provoked a government crisis in the country this week. Another issue that will need to be resolved Sunday is the source of the funding for a second Greek bailout. Britain, which does not use the euro, was involved to a limited extent in an E.U. fund that financed Portugal’s bailout earlier this year. It is insisting that it does not want to take part this time.

That is a political problem for Germany because its Parliament has called for the same fund to be used again, in addition to a newer, euro-zone-only, fund. The leaders of Germany and France, the two biggest countries in the euro zone, meet regularly and are often accused by their E.U. partners of cooking up deals ahead of important summit meetings. They did that last October in the seaside French resort of Deauville. Germany had wanted automatic sanctions on countries that run up high budget deficits, but it accepted softer ones in exchange for agreement by Paris on involving private creditors in the permanent rescue mechanism that takes effect in 2013.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.