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EU Supports Debt Rules in Retreat From Merkel Demands

Angela Merkel, Germany's chancellor
Angela Merkel, Germany's chancellor. Photographer: Jochen Eckel/Bloomberg

European finance leaders backed a Franco-German compromise on post-2013 sovereign bailouts that waters down calls by German Chancellor Angela Merkel for investors to assume losses and share the costs with taxpayers.

The plan will ask investors to take write-offs on a “case-by-case” basis, according to a statement issued late yesterday by euro-area finance ministers after a meeting in Brussels to ratify a bailout for Ireland. The proposal is designed to address “collective action clauses” for debt issued after temporary crisis facilities expire in 2013. Such clauses allow bondholders to change terms of their contracts.

Merkel has been at odds with Jean-Claude Juncker, the head of a group of euro finance chiefs, and European Central Bank President Jean-Claude Trichet as she sought to ensure what she calls the “primacy of politics” over markets. Leaders in Spain and Ireland blamed her for spooking investors and raising borrowing costs. Merkel said Nov. 18 she was “absolutely convinced” that creditors had to share bailout costs.

Trichet embraced the compromise, saying it was “very necessary that there would be a full clarification of the doctrine.” He said the ministers’ view was “a useful clarification from our standpoint.”

“Doubtless Merkel will tout this accord as a victory after getting the ECB, France and the Commission on board,” Irwin Collier, a professor at Berlin Free University’s Institute of Public Finance, said in an interview. “But the compromise would imply that automatic cuts for bondholders have been dropped. That’s quite a step down.”

Merkel Consultations

Before yesterday’s meeting, Merkel spoke with French President Nicolas Sarkozy, European Union President Herman Van Rompuy, Juncker and European Commission President Jose Barroso, as well as Trichet.

The leaders accelerated their effort to reach a compromise after markets slumped last week, said an aide to Sarkozy who briefed reporters in Paris.

German Finance Minister Wolfgang Schaeuble said that Merkel’s government achieved its aims at the meeting, and denied that Germany had bowed to France on the debt mechanism’s shape. Anything other than a case-by-case approach “would be complete nonsense,” and “that’s why it isn’t contradictory to say as we have that there must definitely be participation by creditors as well,” Schaeuble said today on Deutschland radio.

‘Art of Leadership’

“The art of leadership in Europe -- the chancellor does a very good job of it -- is that one achieves common solutions,” he said. “Many thought it wouldn’t be possible.”

The Irish bailout is forcing Portuguese and Spanish politicians to quell speculation that they are next in line for rescue. The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached a euro-area record of 7.57 percent on Nov. 26. Germany pays 2.73 percent.

Merkel’s stance “hasn’t been helpful,” Irish Prime Minister Brian Cowen said in an interview with the Irish Independent newspaper that was published Nov. 12, nine days before Ireland sought the bailout.

Ireland’s banking system and national finances collapsed after a decade-long property bubble burst, the country fell into a recession and the unemployment rate rose close to 14 percent.

“The proposed clauses for investors are nothing that markets do not know in other currency areas,” said Steffen Seibert, Merkel’s chief spokesman. “The plan holds no surprises for markets.”

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