Official: Germany Won't Let Bondholders Shirk Crisis Cost

German Finance Minister Wolfgang Schaeuble said the euro’s stability depends on making investors pay for future debt crises, brushing aside warnings that Germany’s demands are hurting Europe’s most indebted countries.

Schaeuble’s comments underscore Chancellor Angela Merkel’s push to shield German taxpayers from the risk of bailing out other European countries as she steps up efforts to reshape debt and deficit rules for the euro. EU leaders are due to set “key features” of a permanent debt-crisis mechanism in December after agreeing in principle last week, Schaeuble said.

“Participation of the private sector is a central element of the mechanism,” Schaeuble said in a speech at the Sorbonne University in Paris late yesterday. “I would like to remind those who still have problems with such a crisis resolution mechanism that the currency union was never designed as a model for the enrichment of financial speculators.”

German attempts to put their stamp on the rule overhaul risks alienating European officials including Spanish Prime Minister Jose Luis Rodriguez Zapatero, who are concerned that telling bond investors they will have to shoulder a greater part of any future bailout will spook traders at a time when Ireland and Portugal are struggling to cut their budget deficits.

“Germany must support this instrument,” Economy Minister Rainer Bruederle said in an interview today. Otherwise, “markets can speculate with bonds without risk.”

Irish Bonds Fall

Irish bonds fell for a seventh day, sending the 10-year yield to a euro-era record. Greek bonds were little changed after a run of seven straight declines, the longest losing streak since April. The euro was little changed at $1.4033 at 9:56 a.m. Frankfurt time.

European Central Bank President Jean-Claude Trichet told EU leaders last week he’s concerned that talk of a debt restructuring model from 2013 will hurt the bonds of the euro- region’s so-called peripheral nations, according to an EU official familiar with the discussions.

Greece’s attempt to emerge from the crisis is currently “at its most critical point,” Prime Minister George Papandreou said yesterday, according to an e-mailed transcript of a speech. The budget shortfall in 2009 is “expected to reach 15 percent or more,” or at least five times the EU limit.

Bailout Fund

EU leaders on Oct. 29 backed Merkel’s call for a rewrite of European treaties to create the permanent debt-crisis mechanism. The EU now has a window to devise permanent safeguards for “a lastingly strong and stable euro,” after setting up a 110 billion-euro ($154 billion) bailout for Greece and a temporary 750 billion-euro fund to backstop the currency, Schaeuble said.

Merkel, whose year-old governing coalition trails the opposition in polls, is turning her tough stance on euro-area debt and deficit violators into a theme as she faces six state elections next year.

Her aim is to have governments keep the upper hand in what she called “a battle of the politicians against the markets” in May. “We have to think of our population, which justifiably doesn’t want the taxpayer to always assume all the risk,” she said on Oct. 29. Schaeuble warned against setting off “a dangerous social time bomb” of popular dissatisfaction if taxpayers are left to shoulder the burden alone.

‘More Bite’

The proposed EU measures will yield rules with “more bite” to protect the euro, Merkel said yesterday in a speech in Bruges, Belgium. Along with steps to keep EU members from running up excessive debt, a crisis mechanism enshrined in EU treaties is necessary for the longer term, she said.

“Germany’s plans for burden-sharing in the event of a euro-zone default and the re-statement of the no-bailout law present challenges to the debt market,” Steve Barrow, head of research for Group-of-10 currencies at Standard Bank Plc, said in a note. “We suspect that 10-year Greek spread over Germany will scale 1,000 basis points and Ireland 500 basis points, probably before the end of the year.”

The Greek-German yield spread was little changed at 832 basis points as of 8:39 a.m. in London. The yield on Irish 10- year bonds against German bunds, the euro region’s benchmark, gained 10 basis points to 493 basis points, the most since Bloomberg began collecting the data in 1991.

Merkel said on Oct. 29 that she and Trichet differed on the level of risk the rescue mechanism for indebted euro-area countries means for those governments’ bonds. “I don’t quite share Jean-Claude Trichet’s concern,” she said.

In Bruges, Merkel said steps to keep EU members from running up excessive debt include sanctions that are brought in quicker and earlier, as well as closer EU-wide coordination on economic policy.

The debt mechanism intended to replace the euro fund when it expires in three years “needs a clear legal basis” in EU treaties, she said.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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