European finance ministers ruled out immediate aid for Portugal and Spain or an increase in the 750 billion-euro ($1 trillion) crisis fund, counting on European Central Bank bond purchases to calm debt-spooked markets.
A week after handing Ireland an 85 billion-euro lifeline, the finance chiefs voiced confidence that Spain and Portugal will tame their budget deficits and said the existing credit line is enough to defend them in an emergency.
“Whoever bets on the collapse of the euro is wasting his money,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels after a two-day meeting. “We shouldn’t make markets any more nervous. Instead, we should do everything to get markets to have a more realistic view of the situation.”
A 22-week high in ECB bond-buying brought a respite from speculative attacks, masking divisions between the 16 euro-area governments over the next steps to fight the explosion of debt that threatens the currency.
As the Irish parliament prepared to approve spending cuts, finance ministers from all 27 European Union countries endorsed the EU budget’s 22.5 billion-euro share of the support program and gave Ireland an extra year, until 2015, to bring its deficit down to European limits.
‘Huffing and Puffing’
“As the market ‘wolves’ are likely to keep huffing and puffing, we believe that European leaders will ultimately take further steps rather than have the house blown down,” Michala Marcussen, head of global economics at Societe Generale SA in London, said in an e-mailed note. “For now, the ECB remains the best line of defense.”
European bonds fell in unison today as investors poured money into stocks. Portugal’s extra yield over German 10-year bonds fell 1 basis point to 308 basis points. Spain’s was unchanged at 230 basis points and Italy’s fell 3 basis points to 162 basis points. All three spreads remained below the levels of Nov. 28 when the Irish package was announced and the ECB stepped up its buying of government debt.
Forecasts of 1.7 percent euro-area growth in 2010, led by Germany’s export-driven 3.7 percent, show that “everything is not as black as it may seem,” EU Economic and Monetary Commissioner Olli Rehn said. “There is a certain dualism, even a contradiction, between the developments on the one hand in the real economy and on the other hand in the financial markets.”
The forecasts, released Nov. 29, indicate a slowdown to 1.5 percent growth in 2011 as Germany’s surge moderates and the spending squeeze prolongs the recession in Portugal and Greece.
Germany led the opposition to an increase in the crisis-aid fund or the launch of joint bond sales, with Chancellor Angela Merkel dodging further costs for taxpayers in Europe’s largest economy.
Portugal in Crossfire
Portuguese Finance Minister Fernando Teixeira dos Santos bucked “strong” pressure to ask for aid, Lisbon-based Publico newspaper reported today, citing an unidentified European diplomat. Teixeira dos Santos declined to comment in Brussels.
The Frankfurt-based central bank said yesterday that it settled 1.965 billion euros of bond purchases last week. While the figure was the highest since June, it didn’t include bonds bought between Dec. 1 and Dec. 3. The bank bought Irish and Portuguese government bonds today, according to at least two people with knowledge of the transactions.
The policy is controversial inside the bank. “It’s not up to the ECB to save countries where governments run the risk of becoming insolvent,” Nout Wellink, the Dutch central bank chief, said late yesterday in Amsterdam.
Facing criticism for underwriting aid for fiscally reckless governments, Merkel is drifting back into the role she played in the early stages of the crisis, when Germany held out against an aid package for Greece.
Greece won a 110 billion-euro EU-IMF rescue in May, leading the EU to create the three-year facility that was first tapped by Ireland.
ECB President Jean-Claude Trichet indicated last week that EU governments might need to top up the emergency fund, a position echoed by Belgian Finance Minister Didier Reynders and Guy Quaden, Belgium’s representative on the ECB’s policy-setting council.
Klaus Regling, who manages the 440 billion-euro part of the package financed by euro governments, said it is a mistake to think the EU hasn’t set aside enough to deal with any contingency.
“This is wrong,” Regling told reporters. “There are sufficient resources left to deal with other relevant cases if needed.” He said the first sale of 5 billion euros of bonds to finance Ireland’s package will take place in the second half of January.
Germany also sought to stifle public debate over possible joint bond sales after Italy announced its backing for “E-Bond” proposals. In a Financial Times commentary yesterday, Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti urged the creation of jointly sold securities to cover as much as half of the borrowing of euro-area governments.
Austrian Finance Minister Josef Proell objected, telling reporters in Brussels that governments that fail their budget-cutting homework shouldn’t benefit from lower borrowing costs provided by “countries committed to economic discipline that do the hard work and maintain stability.”