EU's Leaders Must End Debt Restructuring `Taboo,' German CDU's Lauk Says
European leaders should drop their “taboo” against debt restructuring, the head of the business caucus of Chancellor Angela Merkel’s party said, indicating that she has support to take more aggressive action in stamping out the euro-area crisis.
“I would recommend looking at it very closely, stop declaring it taboo and do the appropriate analysis to see where that would lead,” Kurt Lauk, president of the German Christian Democratic Union’s Economic Council, said in a phone interview.
The pick-up in European economic growth means the bloc can better withstand default by debt-addled smaller countries such as Greece, Ireland and Portugal, Lauk said. He also revived a proposal aired last year by German Finance Minister Wolfgang Schaeuble for a “European Monetary Fund,” saying it would be the centerpiece of a broader crisis-fighting strategy.
Lauk’s comments contrast with the immediate criticism by some lawmakers in Merkel’s coalition to proposals that emerged last week to blunt the crisis. Purchases of Greek debt and lower interest rates on rescue loans, aid for Portugal and guarantees against excessive debt are being considered, four people with direct knowledge of the talks told Bloomberg News last week.
Schaeuble said Jan. 13 that European Union governments are formulating a “comprehensive package” to blunt the debt crisis that started in Greece and now threatens Portugal and Spain.
Greek bonds fell yesterday after Die Zeit reported that Germany is considering a plan that would help the Mediterranean nation buy back its own securities.
Greece would be allowed to repurchase bonds with funds from the EU’s 440 billion-euro rescue fund, the European Financial Stability Facility, made available “with favorable interest conditions,’” the German newspaper said, without saying where it got the information. Greek bonds pared their losses after the German Finance Ministry denied it was working on a “restructuring” of Greek debt.
Greek 10-year yields were three basis points lower at 11.46 percent as of 8:15 a.m. in London. Spanish 10-year bond yields were two basis points higher at 5.39 percent, while Irish yields gained one basis point, to 8.93 percent.
Greek bondholders are unlikely to get all their money back on schedule unless borrowing costs fall, said Andrew Wilson, head of fixed-income at Goldman Sachs Group Inc.
“Some form of restructuring is a relatively high- probability event” after 2011, Wilson said in Bloomberg Television’s “On the Move with Francine Lacqua.”
The dollar fell to the lowest in almost two months against the euro yesterday amid speculation European officials are addressing the region’s debt crisis and signs the U.S. economic recovery will remain sluggish. The dollar touched $1.3539 per euro, the weakest since Nov. 23. It rose to $1.3453 per euro at 9:38 a.m. in Berlin.
Lars Feld, a professor at the University of Freiburg who is an interim economic adviser to the German government, said a Greek default was probable and that Merkel’s government should prepare for that eventuality.
The Greek government’s program of budget cuts, which has triggered riots on the streets of Athens, is so severe that “arithmetically it could happen, that much is clear, but the burden is enormous and it’s just not politically feasible,” Feld said yesterday in a phone interview from Freiburg.
“Markets are indeed expecting that Greece will need to restructure debt, but that doesn’t take account of developments because the program in Greece is going well,” Klaus Regling, who manages the EFSF bailout fund, said today on Germany’s Deutschlandfunk radio. “We assume Greece’s creditworthiness will increase again as it implements the reforms.”
The CDU’s Lauk criticized EU leaders for reacting to market speculation rather than stamping out the source of debt concern, saying the EFSF, crafted in May last year, was only sufficient to “buy time.” Policy makers would gain the upper hand by debt restructuring and creating a European Monetary Fund, he said.
The proposal made last March as a way to provide lending to deficit-plagued states in return for austerity measures, along the lines of the IMF, “was probably too complex as an institution to be established in such a short term,” Lauk said. “Now we have had a year to think about it, so it’s time to discuss it openly.”
Lauk favors a four-point plan to tackle the sovereign debt woes that would end the “cat-and-mouse game” of EU leaders struggling to react to market speculation. The plan must include more credit lines made available for indebted states and closer economic and fiscal cooperation among EU members, Lauk said.
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