Germany Rejects Pleas to Increase European Aid Fund, Introduce Joint Bonds

Germany rejected calls to increase the European Union’s 750 billion-euro ($1 trillion) aid fund or introduce joint bond sales, signaling its refusal to bear extra costs to stamp out the debt crisis.

With European finance ministers gathered in Brussels today for their monthly meeting, German Chancellor Angela Merkel rebuffed pleas from Belgium and central bankers to boost the emergency fund to save countries such as Portugal and Spain from falling prey to speculation.

“Right now I see no need to expand the fund,” Merkel told reporters in Berlin. She said EU treaties bar joint bond sales, which might force up Germany’s borrowing costs, the lowest in the euro area.

European political discord pushed down bonds in Spain and Italy today, reversing gains made last week after purchases by the European Central Bank briefly eased concern about the spreading crisis. The ECB bought the most bonds in a week since June, according to a statement today.

The yield on Spain’s 10-year notes climbed 9 basis points to 5.08 percent as of 5 p.m. in London. Italy’s yield rose 7 basis points to 4.47 percent. The euro halted a three-session rally, dipping 1 percent to $1.3283.

‘No Credibility’

Europe has “no credibility” in ruling out debt restructurings, Kenneth Rogoff, a Harvard University professor and former International Monetary Fund chief economist, said in a Bloomberg Television interview broadcast today. “Greece will be very lucky to avoid restructuring, Ireland, Portugal -- they’re just in denial, saying it can’t happen. They really haven’t drawn clear lines, they haven’t really said what they wanted to do, they haven’t really made choices.”

Photographer: Jock Fistick/Bloomberg

Didier Reynders, Belgium's finance minister. Close

Didier Reynders, Belgium's finance minister.

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Photographer: Jock Fistick/Bloomberg

Didier Reynders, Belgium's finance minister.

Under pressure to shield taxpayers in Europe’s largest economy, Merkel is drifting back into the role she played in the early stages of the crisis, when Germany held out against an aid package for Greece.

The political standoff may saddle the ECB with more of the crisis-management burden, said Citigroup Inc. economists including Juergen Michels and Michael Saunders in London in a Dec. 3 e-mailed note.

“Eventually the ECB will be forced to increase its contribution to the rescue packages substantially,” the economists wrote. “We expect that after another round of market tensions, the European fiscal policy makers will eventually come up with additional measures to fight the crisis.”

ECB Bond Purchases

The Frankfurt-based central bank said today it settled 1.965 billion euros of bond purchases last week. While the figure was the highest in 22 weeks, it didn’t include bonds bought between Dec. 1 and Dec. 3.

The bank is “actively” operating in the government bond market, Governing Council member Athanasios Orphanides said today in Nicosia. The ECB will act as necessary, said Orphanides, who heads the Cypriot central bank.

Greece won a 110 billion-euro EU-IMF rescue in May, leading the EU to create the three-year facility that was first tapped by Ireland with an 85 billion-euro program last month.

ECB President Jean-Claude Trichet indicated last week that EU governments might need to top up the emergency fund, a position echoed Dec. 4 by Belgian Finance Minister Didier Reynders.

Reynders said the IMF also wants the EU to put up more money and would boost its 250 billion-euro share. IMF spokesman William Murray declined to comment. Managing Director Dominique Strauss-Kahn is at tonight’s Brussels meeting.

Quaden’s Call

Belgium’s central bank governor, Guy Quaden, today called for an increase, telling reporters in Brussels: “It’s up to politicians to decide that, but personally I’m rather in favor.”

Belgium, with the third-highest debt in the euro area, came under speculative attack last week. Its 10-year borrowing costs rose as high as 139 basis points over Germany’s on Nov. 30, the widest spread in at least 17 years.

Germany also sought to stifle public debate over possible joint bond sales after Italy announced its backing for “E- Bond” proposals by Luxembourg Prime Minister Jean-Claude Juncker, the chairman of tonight’s euro meeting.

Merkel said the European consultations “should be goal- oriented and conducted internally, because anything else causes renewed anxiety.”

In a Financial Times commentary, Juncker and Italian Finance Minister Giulio Tremonti urged the creation of jointly sold securities to cover as much as half of the borrowing of euro-area governments.

Austrian Objections

Austrian Finance Minister Josef Proell objected, telling reporters in Brussels that “countries committed to economic discipline that do the hard work and maintain stability” shouldn’t be forced to subsidize the fiscally weak.

To deal with that opposition, bonds of countries with higher budget deficits could be converted into European bonds at a discount, Juncker and Tremonti said.

Eurobonds are “intellectually attractive,” EU Economic and Monetary Affairs Commissioner Olli Rehn said. Greek Prime Minister George Papandreou told reporters in Brussels that it is time to “seriously discuss” the idea.

Finance ministers from the 16 euro countries met at 5 p.m. in Brussels to consider the next steps, including the shape of a permanent crisis-resolution framework to replace the temporary fund when it runs out in 2013.

The two-day Brussels meetings conclude tomorrow when ministers from all 27 EU countries give formal approval to the Irish aid package announced Nov. 28, designed to stabilize the banking system and push down the deficit.

“We’ve come here to decide what we prepared Sunday a week ago,” German Finance Minister Wolfgang Schaeuble said. “We don’t need to have new debates every week. I think we’ve prepared the necessary decisions.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net

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

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