European Union leaders dropped their demand that investors share the cost of bailouts as Germany abandoned a campaign that helped deepen the two-year-old financial crisis.
Limiting so-called private-sector involvement to the terms accepted in International Monetary Fund bailouts was part of a package agreed upon in Brussels early today as leaders met to forge tighter economic bonds to stem the crisis.
“As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” EU President Herman Van Rompuy told reporters at a briefing. “Or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.”
That marks a defeat for German Chancellor Angela Merkel who wanted to expose bondholders to losses in debt restructurings as her electorate resented writing the biggest bailout checks. Her push, which began last year, drew criticism from a European Central Bank concerned it would fan contagion and was blamed for some investors for driving up bond yields and forcing Ireland and Portugal to seek aid packages.
“They underestimated the contagion effect,” said Michael Leister, a fixed-income strategist at WestLB AG in London.
European disagreement over Merkel’s call also threatened to derail efforts to speed the setup of a permanent bailout fund, three people involved in the negotiations said last month. France, Spain, Portugal and Ireland were among those lobbying against Germany and the Netherlands.
With Merkel backing down, leaders agreed this morning to now accelerate the start of their 500 billion-euro fund ($666 billion) to next year.