Schaeuble Declares Markets Wrong as Europe Heads to Vacation

German Finance Minister Wolfgang Schaeuble declared bond traders all wrong in driving up Spanish borrowing costs to unsustainable levels.

After issuing the statement late yesterday, Schaeuble, 69, went off duty for a three-week vacation.

It’s summertime in Europe, and like last year, borrowing costs are rising as investors fret over the fate of the 17- nation euro area. Most government leaders are heading to their favorite beaches, mountains and lakes to take a break from a crisis that U.S. Treasury Secretary Timothy Geithner said July 23 requires “immediate, short-term” measures to help Spain and Italy.

“The markets are clearly very unsettled,” said Sarah Hewin, London-based head of research in Europe for Standard Chartered Plc. “We’re in a position now where we’re in the middle of summer” with no summits and meetings of policy makers to focus on.

The summer-holiday season in 2011 saw a spasm of turmoil that forced the European Central Bank to step in and buy Spanish and Italian debt for the first time and required emergency meetings among policy makers.

Now, Schaeuble and German Chancellor Angela Merkel, who has left Berlin for her usual two- to three-week break, are fortified by gains in bunds, Europe’s haven security.

South of France

French President Francois Hollande will remain in his own country in the south. Belgian Prime Minister Elio Di Rupo will head to Italy next month to the Abruzzo region. Portuguese Prime Minister Pedro Passos Coelho will be on vacation in the first two weeks of August and will stay in his country, newspaper Diario Economico reported on July 21.

In contrast, Spanish Prime Minister Mariano Rajoy currently has no plans set for a vacation, though his schedule is currently empty between Aug. 6 and Aug. 17, according to a spokeswoman for the premier’s office. He may add agenda items in that time, depending on events, the spokeswoman said.

Italian Prime Minister Mario Monti, whose caretaker government has less than a year to enact the remainder of his agenda, plans to take a week in the middle of August, an administration official said. In Greece, Antonis Samaras isn’t planning any time off.

“One thing is certain, no one is going away on holiday, and the prime minister has underlined this,” government spokesman Simon Kedikoglou said in an interview on Mega TV today. “The ministers should be at their offices from very early in the morning.”

Troika in Athens

Samaras, who became prime minister last month, will talk with Greece’s creditors this week to assess how far from bailout terms the country has strayed. He will meet with European Commission President Jose Barroso in Athens before seeing the “troika” of officials representing the euro area, the European Central Bank and the International Monetary Fund on July 27.

The temporary vacuum in German leadership leaves investors looking elsewhere for crisis management. Spanish two-year yields fell today for the first time in eight days after ECB council member Ewald Nowotny revived a debate on bolstering the firepower of the European Stability Mechanism rescue fund. There are arguments in favor of giving the ESM a banking license, Nowotny said in an interview.

Spain’s two-year yield fell 65 basis points, or 0.65 percent, to 6.12 percent at 3:30 p.m. London time, after climbing to 7.15 percent, the highest since 1996. Yields on Italy’s 10-year bond declined 10 basis points to 6.47 percent, about 5.2 percentage points more than the similar maturity German security.

Repaid in Full

“They clearly need to get Spanish bond yields down,” said Gary Jenkins, founder of Swordfish Research Ltd. near London, who has tracked bond markets for more than 15 years. “There’s lots of things they can do to get bond yields down, but it’s more difficult for people to regain confidence that they’re going to get fully repaid in Spanish and Italian bonds.”

The cost of insuring Spanish debt rose to a record yesterday on the prospect that Valencia, which said last week it would tap the central government’s 18 billion-euro ($22 billion) bailout fund, won’t be the last region to seek aid.

“The current levels of interest rates on sovereign debt markets don’t correspond to the fundamentals of the Spanish economy,” Schaeuble and Spanish Economy Minister Luis de Guindos said in a joint declaration after meeting late yesterday.

North Sea

Schaeuble is holidaying on the German North Sea island of Sylt near the border with Denmark. While the government has declined to say where Merkel is on vacation, the country’s best- selling Bild newspaper reported she will make an appearance at the Bayreuth Festival to take in Richard Wagner’s “The Flying Dutchman” before traveling with her husband to the Italian alpine region of South Tyrol, where she holidayed in the past two years.

Werner Faymann, chancellor of AAA-rated, landlocked Austria, has returned to Vienna after two weeks on the Italian island of Sardinia.

Nowotny, also the head of Austria’s central bank, said he is positioned to mix relaxation with work this summer, and that his subordinates will do the same.

“I’m in the lucky position of having a summer home in the lake area of Austria, which also has the advantage of being only a two-hour drive from Vienna,” Nowotny said in the interview yesterday in his office in the capital city. “We always have a fully functioning central bank, but that doesn’t mean that my staff can’t go on vacation.”

To contact the reporter on this story: Andrew Frye in Rome at afrye@bloomberg.net

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

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