MercoPress. South Atlantic News Agency

German parliament approves Euro bail out fund to cut Greek contagion

Chancellor Merkel coalition celebrates, but several hurdles still ahead (Photo Reuters)

A large majority in the German parliament has approved expanded powers for the EU main bailout fund. Chancellor Angela Merkel received stronger than expected support in the Bundestag despite some in her coalition vowing to oppose the bill.

Many Germans are against committing more money to prop up struggling Euro zone members such as Greece. The measure is expected to pass in Germany's upper house of parliament, where it will be put to a vote on Friday.

Five-hundred and twenty-three deputies in the Bundestag approved the bill, 85 voted against and three abstained in the 620-seat chamber. Nine members were not present.

The outcome of the vote was not in question, as the main opposition parties, the SPD and the Greens, indicated they would support the expansion of the fund.

But the 315 coalition deputies also voted in favour, meaning that Mrs Merkel did not have to rely on opposition support to get the measure passed. Before the vote, there was intense lobbying by Mrs Merkel's Christian Democrats (CDU) and their coalition allies to pressure the handful of dissidents to get in line.

“The support of the Bundestag is an important step for stabilizing the Euro zone,” Michael Kemmer, head of Germany's Bank Federation, told the news agency dpa. “With that, they have set a course that leads out of the debt crisis.”

The 440 billion Euro (600 billion dollars) fund will be able to buy government bonds and lend money to banks and governments before they are in a full-blown crisis, making Europe's response to market jitters more rapid and pre-emptive.

Germany, which pays the lion's share of European bailouts, became the 13th member of the Euro zone to support the expansion of the rescue fund, the so-called European Financial Stability Facility, or EFSF. Cyprus also passed the bill on Thursday.

Austria's parliament is widely expected to pass the measure on Friday, the same day Germany's upper house of parliament is set to finalize Thursday's vote, while the Netherlands is expected to approve it in the first week of October.

The biggest remaining hurdle is the final country to vote - Slovakia - where the government will not have enough support to pass it if the leader of the junior coalition Freedom and Solidarity party follows through with threats to vote against the fund's expansion. Its parliament is to vote later in October.

“It was a strong statement of Angela Merkel's position. She has the backing and the support of the coalition and she is able to negotiate on the European level,” Peter Altmeier, the parliamentary whip for Merkel's Christian Democrats, said after the tally was announced.

Markets appeared calmer even before Thursday's votes, following weeks of turbulence triggered by uncertainty over Germany's position on the fund. The euro also traded slightly higher.

The lingering problem, however, is that investors are resigned to the fact that Greece will have to default - that is, impose tougher losses on its bondholders.

Greece was saved from default by an initial 110 billion Euros bailout in May last year before the EFSF was established to help any other countries in trouble. A planned second rescue package for Greece this year includes a voluntary participation by private bondholders, who agreed to write off about 20% on their Greek debt holdings.

Many experts say those write-downs should be closer to 50%. The debate among European leaders now is whether to allow such a move under controlled conditions, providing help to banks that may take heavy losses on Greek bonds they hold.

Germany and the Netherlands are open to the option, with Merkel suggesting this week that Greece's second bailout deal might have to be renegotiated. France and the European Central Bank, however, oppose the idea.

Greece's international debt inspectors returned to Athens on Thursday to complete a review. Merkel has said that any new decisions would depend upon the results of the inspectors' report, which is not due for days.

Forging consensus over new measures - particularly something as delicate as imposing more severe losses on Greece's creditors - will likely be very difficult, however.

Indeed, the parliamentary debate on the EFSF in Berlin on Thursday was a feisty three-hour long affair, reflecting how high tensions in Merkel's coalition were running over the idea of providing more backing to the Euro zone's weakest members.

In addition, the Bundestag will face another major vote early next year on the fund's permanent replacement, the European Stability Mechanism, which is due to take effect in 2013