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EU Backs German Call for Debt Mechanism, Spars on Restructuring

Angela Merkel, Germany's chancellor
Angela Merkel, Germany's chancellor. Photographer: Michele Tantussi/Bloomberg

European Union leaders endorsed German calls for a rewrite of EU treaties to create a permanent debt-crisis mechanism, while sparring over whether to force bondholders to help pay the bill for rescuing financially distressed states.

As the biggest contributor to this year’s hastily arranged 860 billion euros ($1.2 trillion) in loans and pledges to stem the debt crisis, Germany won backing to set up a permanent system by 2013. Deficit-strapped Spain warned that provisions to reschedule or cancel some debts would expose its markets to renewed selling pressure.

“We won’t allow only the taxpayers to bear all the costs of a future crisis,” German Chancellor Angela Merkel told a press conference in Brussels today after a summit of EU leaders. There is “a justified desire to see that it’s not just taxpayers who are on the hook, but also private investors.”

Speculation that Germany, the 16-nation euro region’s largest economy, will get its way spurred declines in bonds in Greece, Ireland and Portugal, in a reminder that Europe has yet to overcome the crisis that shook the currency’s foundations six months ago.

Prime Minister Jose Luis Rodriguez Zapatero of Spain, whose country has Europe’s second-highest deficit, said he is “very cautious about the inclusion of the private sector in the mechanism.”

December Deadline

EU leaders said the structure of the system remains open, setting a December deadline for the European Commission to sketch out how it might work, to study how to treat private bondholders and whether to involve the International Monetary Fund. EU President Herman Van Rompuy will devise a way to embed the new system in the bloc’s governing treaties.

Ten-year bonds in Greece, saved from the brink of default by EU and IMF loans in May, fell, pushing the extra yield over German debt to 808 basis points, the highest since Sept. 30. The spread over German bunds is now 342 basis points for Portuguese bonds and 443 basis points for Irish bonds.

“The immediate reaction has been negative for all the peripheral countries,” said Christoph Kind, who helps invest about $20 billion as head of asset allocation at Frankfurt Trust in Frankfurt. “The proposal is very important and the market is pricing in the danger that it may be realized at some point.”

Germany rules out extending this year’s emergency taxpayer-funded financial assistance mechanisms when they expire in 2013. Merkel’s follow-up system would extend debt maturities, suspend interest payments and waive creditor claims, Handelsblatt newspaper reported yesterday, citing an unidentified government official.

‘Faults of Others’

“One has to be careful that this won’t chase away investors in Europe where they could in the end pay up as well through the faults of others,” said Luxembourg Prime Minister Jean-Claude Juncker, who chairs the euro-region finance panel. “The question on how far the private sector should be included” in the crisis mechanism “is a very difficult question that has to be addressed very cautiously.”

To avoid a constitutional fight in Germany, Merkel wants to enshrine the crisis-management system in the EU’s treaties, which were last amended in 2009 after eight years of bargaining and referendum vetoes in three countries.

Germany pushed through an agreement to use a new fast-track procedure that lets the EU fine-tune the governing treaty as long as the amendments don’t transfer power from national capitals to EU headquarters in Brussels.

Irish Vetoes

Prime Minister Brian Cowen of Ireland, which twice triggered political logjams by vetoing EU treaties in referendums, signed up to an amendment as long as it is done in “as narrow and as simplified a way as possible.”

Merkel made less headway with calls to bar high-deficit countries from voting on EU decisions, dramatizing the limits of Germany’s power over the 27-nation bloc. Merkel found little support for her proposed suspension of voting rights for countries that repeatedly overshoot the euro’s budget-deficit limit of 3 percent of gross domestic product.

Merkel tried a new tactic at the summit, saying that existing provisions to suspend voting rights for governments that trample EU values such as human rights and democracy could be used to punish fiscal recklessness.

‘No Agreement’

The result was “absolutely no agreement about this,” Juncker said. “I’m very happy that the issue of voting rights isn’t on the table but has been kicked down the road.” The EU will still examine possible curbs on the euro countries’ voting rights on economic decisions.

Germany’s leverage was undermined by a deal with France last week to soften near-automatic sanctions on high-deficit states under a separate set of proposals going through the EU legislative process. That reversal awakened memories of moves by the previous German and French governments to suspend the rules in 2003 when they faced sanctions.

While last week’s sanctions compromise ran into criticism from smaller countries and European Central Bank President Jean-Claude Trichet, the broad outlines were backed at the summit. No country has been fined in the euro’s almost 12-year history for overstepping the deficit limit.

EU governments and the European Parliament will shape the new legislation by the end of March. The parliament may try to tighten the rules.

“Mrs. Merkel may think that economic governance hinges upon a Franco-German agreement,” Sharon Bowles of the U.K., head of the parliament’s economic and monetary committee, said in a statement. “We are not going to put a rubber stamp on any backroom deals.”

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