European Finance Chiefs Unveil Debt-Fighting Tool in Face of ECB Criticism
European Union Economic and Monetary Commissioner Olli Rehn
Jock Fistick/Bloomberg
Olli Rehn, the European Union's economic and monetary affairs commissioner.
Olli Rehn, the European Union's economic and monetary affairs commissioner. Photographer: Jock Fistick/Bloomberg
March 22 (Bloomberg) -- Georg Grodzki, global head of credit research at Legal & General Investment Management, talks about the outlook for European bond markets. He speaks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)
European finance ministers announced new steps to fight the debt crisis, running into European Central Bank criticism for doing too little to prevent budget shocks from threatening the euro.
Finance chiefs settled on how to enable a permanent rescue fund to lend 500 billion euros ($710 billion) as of 2013, while remaining divided over how to get the current stopgap fund up to its full capacity of 440 billion euros.
“We now have a comprehensive strategy to strengthen the foundations of the euro area and to restore confidence in euro- area sovereign bond markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after a meeting of EU finance ministers in Brussels yesterday.
Europe’s full package to stamp out the debt crisis fell short of the original ambitions, dropping proposals to enable debt buybacks or relieve the central bank of the task of purchasing distressed countries’ bonds. As the ECB pivots from debt-crisis management to its main mission of combating inflation, it grumbled that governments haven’t given the current and future rescue funds enough versatility.
Refusal to let the funds buy bonds on the market is “not in line with what we’ve recommended,” ECB President Jean-Claude Trichet told a European Parliament committee in Brussels yesterday. “I continue to consider secondary-market interventions as a helpful tool. The ECB supports the largest possible recourse.”
Secondary Market
The ECB’s purchases of 77.5 billion euros of bonds on the secondary market built a firewall against the spread of the crisis from Greece and Ireland, the first two countries to fall back on joint EU-International Monetary Fund aid packages.
“Trichet is repeating himself,” said Luxembourg Prime Minister Jean-Claude Juncker, the chairman of yesterday’s meeting. “I wouldn’t say that I was in total disagreement with him.”
Germany, the biggest contributor to last year’s 177.5 billion euros in aid for Greece and Ireland, insisted on flanking the support measures with a toughening of sanctions against runaway budget deficits that have gone unenforced since the euro’s debut in 1999.
The new rules, together with monitoring of macroeconomic imbalances such as current-account deficits, are set to go before the European Parliament after approval by finance ministers last week.
Billionaire investor George Soros said the result will be a “two-speed” economy dominated by northern European exporting powers such as Germany while southern Europe lags.
‘Two-Speed Europe’
The reforms will “set in stone a two-speed Europe,” Soros wrote in the Financial Times yesterday. “This will generate resentments that will endanger the European Union’s political cohesion.”
Yesterday’s discussions, the last before a March 24-25 leaders summit to endorse the anti-crisis package, were limited to the fund to be set up in 2013, known as the European Stability Mechanism.
The ESM will draw on 80 billion euros of paid-in capital and 620 billion euros of callable capital, enabling it to lend 500 billion euros. Countries with per capita gross domestic product below 75 percent of the European average -- currently Estonia and Slovakia -- will pay less for 12 years.
The future aid facility will charge 200 basis points more than its funding costs to lend for up to three years, tacking on an extra 100 basis points for longer-term loans. Finance ministers confirmed that the ESM will enjoy preferred creditor status and will follow IMF case-by-case standards for deciding whether to require private bondholders to share the costs of bailouts.
‘Sustainable’ Debt
Investors in countries with debt deemed “sustainable” will be encouraged to hold bonds to maturity, according to an ESM term sheet. A country with “unsustainable” debt will “engage in active negotiations in good faith with its creditors to secure their direct involvement.”
Future aid will be cheaper than the 5 percent rate set for Greece and 5.8 percent for Ireland last year. Greece has since won a 1 percentage-point reduction and longer repayment period, while Ireland is pressing for a better deal.
Divisions persisted over boosting the fund operating until 2013 to its full potential of 440 billion euros. Juncker said his “personal guess” is that the method, to be decided by June, would be increased guarantees. Most of the burden would fall on the euro area’s six AAA-rated countries: Germany, France, the Netherlands, Luxembourg, Austria and Finland.
Greek Phase
Set up last May at the height of the Greek phase of the crisis, the stopgap fund, known as the European Financial Stability Facility, is only able to lend around 250 billion euros due to collateral rules to underpin its AAA credit rating.
Domestic politics dogs the plan to strengthen the safety net, which requires approval of parliaments in all 17 euro-zone nations. On the political defensive at home after setbacks in regional elections, German Chancellor Angela Merkel has taken a hard line on bailouts.
Merkel two days ago suffered the second regional bruising in a month when her party stumbled in the eastern state of Saxony-Anhalt. More state elections loom on March 27 in Rhineland-Palatinate and Baden-Wuerttemberg, where her Christian Democratic Union is struggling to cling to a near-six-decade hold on power.
The next country to face a national election is Finland, home to the anti-euro “True Finns” party that polls show will come in second in the April 17 balloting, potentially giving it a stake in government.
‘Political Backlash’
“Watch the national ratification process,” Gilles Moec, an economist at Deutsche Bank AG in London, said in an e-mailed research note. “It is in Finland that the political backlash could be the fiercest.”
As Portugal tries to escape the fate of Greece and Ireland, its minority government is battling on two fronts: to win opposition support for new budget cuts and to deflect blame in case the political deadlock over more austerity leaves an aid package as the only way out.
The leader of the main opposition party, Pedro Passos Coelho, called for savings while rejecting the government’s method for slicing of 0.8 percent of GDP out of the budget in 2011, 2.5 percent in 2013 and 1.2 percent in 2013.
“If we open a political crisis at this moment it will create great difficulties for our country to access financial markets,” Portuguese Finance Minister Fernando Teixeira dos Santos said yesterday. “A political crisis would push the country to fall in the arms of external aid.”
Portugal’s 10-year bonds now yield 413 basis points more than German bonds. The spread, a reflection of the risk of lending to the Portuguese government, peaked at 484 basis points on Nov. 11.
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
Rate this Page