The German parliament opted to launch Greece's second bailout for fear that casting the debt-stricken country adrift would be more damaging to Europe than keeping it on a steady drip of taxpayers' money.
The Bundestag on Monday voted 496 to 90 in favour of the €130-billion bailout, raising Greece's total tab to €240-billion since 2010. As Europe's biggest economy, Germany is the single biggest sponsor of the bailout.
While Chancellor Angela Merkel's victory was never in doubt, the vote defied popular opinion, exposed rifts within her government and convinced almost no economists that it would put Greece on a sustainable economic course.
Support among her ruling centre-right coalition was not unanimous. Seventeen of the 330 members voted against the bailout.
Speaking just before the vote, Ms. Merkel told parliamentarians in Berlin that a "no" vote would endanger the entire European Union, still the world's biggest trading bloc, potentially damaging the global economy. "I think those risks are incalculable and therefore indefensible," she said. "I should have to take risks [as chancellor] but I cannot embark on adventures. My oath forbids that."
The vote came the same day that the German newsmagazine Spiegel published an interview with Interior Minister Hans-Peter Friedrich, a member of the Bavarian sister party to Ms. Merkel's Christian Democratic Union. In it, he urged Greece to leave the 17-country euro zone, saying "Greece's chances to regenerate itself and become competitive are surely greater outside the monetary union than if it remains in the euro area."
Wolfgang Schaeuble, the powerful German Finance Minister who has expressed doubts that Greece can meet its fiscal targets given its deteriorating economy, recently called the country a "bottomless pit" and suggested it be allowed to default. He nevertheless voted in favour of the bailout.
German voters are increasingly taking the view that Greece should be cut loose. An opinion poll published in the Bild am Sonntag newspaper on Sunday showed that 62 per cent of Germans oppose the rescue package, with 33 per cent in favour. In the previous poll, in September, 53 per cent opposed the package.
Almost two-thirds said they were not convinced that Greece can be spared from bankruptcy. On Monday, Bild, Germany's top-selling tabloid, called on the Bundestag to let Greece default. "Billions for Greece – Stop!," the headline blared.
Ms. Merkel stressed that Germany would approve the bailout as long as Greece keeps its austerity and economic reform commitments. The problem is that most of the commitments made in exchange for the first bailout were not kept by Greece, save for the tax increases that have helped to plunge the country into debilitating recession.
As Greece's economy enters its fifth year of recession, Germany fears that the politicians – spring elections are in the offing – will try to win votes by campaigning on an "austerity-lite" platform that would make a mockery of the current government's pledges.
With the Greek bailout approved, Ms. Merkel already faces another battle. She is under pressure to take an extra precaution against debt contagion by boosting the size of the €500-billion European Stability Mechanism, the euro zone's permanent rescue fund that is to come into existence in July.
While Ms. Merkel called for speedier payments into the ESM so that it is fully capitalized in two years instead of five, she is resisting boosting the fund's size to €750-billion or so. "With the voluntary debt restructuring for Greece, we are entering new territory," she said. "If it is a success, then the contagion risk for other countries will be further reduced. Now we need to wait and see what happens."
The contagion risk seems to have dissipated somewhat. On Monday, Italy sold €12.25-billion of six-month paper at only 1.2 per cent, the cheapest since September, 2010. A month ago, Rome had to pay 2 per cent to sell a similar bond.
The bailout is being launched in conjunction with a "haircut" on Greece's privately held sovereign bonds that will see investors lose 53.5 per cent of the face value of their holdings of €206-billion. Greece will know on March 10 what percentage of the bondholders will agree to the "voluntary" debt swap. If the number is low, so-called collective action clauses approved by the Greek parliament could be triggered, forcing the holdouts into the deal.
Economists are under no illusion that the bailout, combined with bond haircut, will save Greece, though it will spare the country from a disorderly default on March 20, when it must redeem bonds worth €14.5-billion. In a note, economists at Deutsche Bank said "the medium to long-term sustainability of Greek debt remains highly uncertain. … Why then do the deal? The reason, once again, is to 'muddle through,' to 'kick an expensive can' [down the road]"