Germany's Bundesbank has fired a warning shot at Chancellor Angela Merkel,
attacking the joint EU-IMF rescue plan for Greece as a threat to
economic
stability and probably illegal.

Telegraph.co.uk

By Ambrose Evans-Pritchard






Published: 10:44PM BST 08 Apr 2010

impose tougher budgetary discipline. " height="287" width="460"">

The Bundesbank, headed by ultra-hawk Axel
Weber, said the decision to bring in the IMF makes matters worse,
arguing that the EU would impose tougher budgetary discipline.


Photo: Reuters

played down talk of a continued rift between Berlin and Brussels." height="287" width="460"">

Jean-Claude Trichet, president of the
European Central Bank, played down talk of a continued rift between
Berlin and Brussels.


Photo: Bloomberg

Leaked extracts from an internal report appeared in the Frankfurter Rundschau and may have contributed to a fresh day of mayhem for
Greek
bonds. Investors were already digesting

reports that Greek residents had shifted €10bn (£8.8bn) ...

over the first two months of the year.

The yield on two-year Greek bonds surged by 136 basis points in early trading
to 8.3pc, up from 5.2pc last week. The market stabilised later as
Athens
announced a 40pc cut in the budget deficit over the first quarter,
suggesting that austerity measures are bearing fruit.

The Bundesbank document offers a withering critique of the deal agreed by EU leaders two weeks ago, saying the plan had been cobbled together
without
consulting central banks and will lead to monetisation of debt. "It
brings problems in respect to stability policy that should not be
underestimated."

The joint rescue between the IMF and the EU would turn the Bundesbank into a "money-printing
machine" for the purchase of Greek bonds, according to Rundschau.

This would breach the EU's 'no-bail clause'.

Hans Redeker, currency chief at BNP Paribas, said the report greatly strengthens the hand of EMU critics in Germany. A group of professors
is
already itching to file a complaint at the constitutional court to
block the
Greek rescue. "This reduces Merkel's room for manoeuvre to zero,"
he said.

The Bundesbank, headed by ultra-hawk Axel Weber, said the decision to bring in
the IMF makes matters worse, arguing that the EU would impose tougher
budgetary discipline.

The report mocked the IMF as the "Inflation Maximising Fund", saying the body had gone soft under Dominique Strauss-Kahn, a French
socialist and
Keynesian. It has shifted focus from fiscal cleansing to
"growth-oriented"
financial policies. "Currency reserves from the Bundesbank cannot
plausibly be made available for such purposes," it said.

At the least, it will be hard for Mrs Merkel to relax her insistence on "market
rates" for any loans to Greece. Officials have talked of a figure near

6pc to avoid moral hazard but this has angered Greece. It hopes to
borrow
below 4.5pc like Portugal or Ireland. A Greek government spokesman
said
yesterday that "barbarous conditions" were being imposed on his
country.

Jean-Claude Trichet, the president of the European Central Bank, played down
talk of a continued rift between Berlin and Brussels, saying the EU
agreement to help Greece was "a very, very serious commitment: nobody
should take lightly a statement which is signed by the heads of
state."

"Taking all the information I have, a default is not an issue for Greece,"
he said, speaking after the governing council's meeting. The bank left
rates
at a record low of 1pc.

Laurent Bilke, Europe economist at Nomura and a former ECB official, said
Greece is effectively shut out of the market. "We consider it
increasingly likely that the Greek government will be forced to change

strategy and ask for a rescue. There is really no point waiting for an

'accident' to happen."

Barclays Capital said any rescue would have to be at least €40bn-€45bn to
restore confidence and provide Greece the funding it needs to buy time
for
reform.

As expected, the ECB delayed plans to tighten to its collateral rules, eliminating the risk that Greek banks will lose their lifeline from
Frankfurt's lending window for another year. The IOBE think-tank said
ECB
funding for Greek banks has risen to €65bn over the first quarter. ECB
will
impose a penalty "haircut" on lower grade bonds, but not sovereign
debt. This is a subtle way to help Greece and Italy and other big
debtors.

Julian Callow at Barclays said the Greek gyrations have disguised the good
news that contagion has not spread to Club Med and Ireland. "Greece is

being treated as a case apart because it entered the crisis with a
debt that
was already so high. Ireland has managed to insulate itself despite
the
costs of its banking sector," he said.

If anything, the eurozone looks stronger after the events of the past two
weeks. Analysts say there is no necessary reason why a Greek default –
if it
happened – would in itself damage monetary union.