European policy makers are fighting a “complete lack of confidence” in their ability to resolve the crisis after failing to persuade investors they’re united in their choice of tools to handle the turmoil, Fitch Ratings President Paul Taylor said.
“The key issue in European markets is very much about confidence,” Taylor said in an interview in Copenhagen yesterday. “There is a complete lack of confidence in the system, in the use of tools that could be available and even in the ones that have been announced. The problem through this crisis is that there has been the lack of a central view point.”
Officials inside the currency union remain divided on how to support Spain as its undercapitalized banks threaten to destabilize the euro area’s fourth-largest economy. The European Commission last month lent support to Spanish calls for direct aid from the European Stability Mechanism, while Germany remains opposed to such a model. It’s the latest example underscoring divisions in the 17-member currency bloc that have plagued decision making and prolonged the crisis.
“There is clearly pressure on countries within the eurozone that require some form of response,” according to Taylor, who spoke while attending a meeting of the Institute of International Finance in the Danish capital. “I sympathize, somewhat, with the position that you aren’t going to put short- term market fixes in place while the medium-term structural challenges haven’t been fixed.”
German borrowing costs rose today, with the yield on the 10-year note gaining three basis points to 1.37 percent. Yields on similar-maturity Dutch, Belgian and Austrian notes also rose. Spain sold 2.07 billion euros ($2.6 billion) in bonds today, receiving bids for more than three times that amount. Spanish 10-year yields fell 14 basis points today to 6.14 percent.
Spanish borrowing costs approached 7 percent last week, the level that prompted Greece, Ireland and Portugal to seek bailouts. Spain is struggling to avoid an international loan that would add to its debt burden and wants any aid to go directly to its financial industry. Germany, which is backed by AAA rated Finland in its stance, argues any aid must come with austerity strings attached.
“It needs to be the system, Europe as a whole coming together, probably using the European institutions to form a solution,” Taylor said. “It can’t be individual countries. It needs to be through the European institutions.”
European Central Bank President Mario Draghi said yesterday policy makers discussed cutting interest rates to a record low as they respond to a worsening debt crisis. The ECB, which left its main rate at 1 percent, has been under pressure to help ease the turmoil after political efforts fell short.
While the ECB yesterday extended into next year its policy of lending banks as much money as they want for periods of up to three months, Draghi indicated another round of three-year loans is not imminent, keeping up pressure on governments to improve their response to the crisis.
“I don’t think it would be right for the ECB to fill other institutions’ lack of action,” Draghi said.