Germany May Cut Bailout Rates for Debt Commitment, Asmussen Says

Germany would back lower interest rates on bailout loans in return for a commitment across the euro region to tackle debt and boost competitiveness, Deputy Finance Minister Joerg Asmussen said.

Asmussen said in an interview in New York today that there is “a certain margin” on rescue loans to Greece and Ireland and that “we have to look at this” as part of a package of measures being drafted for a summit of European Union leaders at the end of March.

“We can look at this if countries at the same time would be willing to accept a kind of national fiscal framework to be enshrined in their constitution,” he said at the Bloomberg European Debt Briefing Conference hosted by Bloomberg Link.

Asmussen’s comments are the most explicit outline yet of the thinking in Chancellor Angela Merkel’s government on the sovereign debt crisis. Germany, as Europe’s biggest economy, is leading euro-region efforts to restore investor confidence as the debt turmoil buffets Portugal and Spain just two months after Ireland joined Greece in having to ask for outside help.

The package now being crafted will include short-term crisis-management measures while adding flesh to the bones of a planned permanent safety net for indebted countries, Asmussen said. It will also feature an “enhanced” set of rules governing the euro, known as the Stability and Growth Pact, and closer economic policy coordination.

Debt Buybacks

Asmussen said there was a debate on debt buybacks though declined to give Germany’s position, saying only that “we have to discuss this as part of the comprehensive package.”

“There is a debate and will continue to be one probably until the March European Council about the scope” of the rescue fund, the European Financial Stability Facility, “and what the EFSF can do,” he said. “I’m not in a position to comment on individual activities right now.”

The rate on the rescue loan to Ireland, for example, is about 300 basis points above the bailout fund’s borrowing costs. Greece pays about 5 percent for its European aid.

German bond yields have risen this year, reflecting investor bets that the German economy would bear an increased share of the cost of supporting debt-addled countries. Ten-year bunds yielded about 3.15 percent today, up from 2.96 percent at the end of 2010.

Asmussen cited the German model of a “debt brake,” anchored in the German constitution last year, which limits deficits at state and federal level, and urged a similar model across Europe.

“We have to fix the difficulties we have,” Asmussen said. “It’s not a crisis of the euro. It’s a debt situation that is difficult in some euro zone countries. The Chancellor very clearly said we will do whatever necessary to defend the stability of the euro zone and we have to prove this at the end of March.”

Barroso Dinner

The European Commission, the 27-nation European Union’s executive agency, joined the European Central Bank earlier this month in calling for additional steps, urging agreement by early February. EU leaders are scheduled to meet in Brussels Feb. 4.

Commission President Jose Barroso is due to have dinner with Merkel at the government’s Meseberg retreat outside Berlin today to discuss a response to the debt crisis. Economic and Monetary Affairs Commissioner Olli Rehn meanwhile briefed lawmakers from Merkel’s Free Democratic Party coalition partner, one week after the party criticized a proposed expansion of the 440 billion-euro ($600 billion) EFSF fund.

The coalition parties face elections in seven of Germany’s 16 states starting in less than four weeks, and Merkel risks alienating voters by agreeing to any additional measures to stem the crisis. Germany is already the largest contributor to the EFSF and the Greek rescue.

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Daniel Moss in New York at dmoss@bloomberg.net.

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

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