Italy and Spain would be “too big to be saved” by the euro-area’s financial backstop and debate should focus on the firewall’s quality rather than its size, German Finance Ministry official Ludger Schuknecht said.
Ideas “floating around” to boost Europe’s debt-crisis defenses aren’t “the ideas that the mega-firewall fans might like,” Schuknecht, who heads the department of fiscal policy, international finance and monetary policy in Wolfgang Schaeuble’s ministry, said at a Bloomberg Link Sovereign Debt Conference in Frankfurt today.
“Italy and Spain are too big to be saved by these kind of numbers that we are putting into the window,” he said. Making the firewall credible to markets “is much more important than talking about big numbers that are afterwards just a show.”
With the debt crisis now in its third year, attention is shifting to the euro-area firewall after a successful Greek debt swap that opened the way to a second bailout. European Central Bank President Mario Draghi said in an interview with Germany’s Bild newspaper published today that the worst of the crisis is now over, “but there are still risks.”
In the event that Greece needs another round of debt restructuring, governments and central banks would have to make concessions, Hans Humes, president of New York-based hedge fund Greylock Capital Management, said in Frankfurt.
Private creditors have “stronger bargaining power” after reaching an agreement in February with Greece and European officials on the biggest sovereign debt restructuring in history, said Humes, who is a member of a committee of private bondholders that negotiated the swap with government officials. Investors including banks, insurers and hedge funds agreed to forgive more than 100 billion euros ($132 billion) of debt.
“If there need to be concessions on debt, it’s going to have to come from somewhere else,” Humes said. “We are going to have to look to the official sector and the central banks to make concessions.”
Italy is the country most under scrutiny by policy makers as its financing needs are larger than the support available from Europe’s crisis-fighting resources, Standard & Poor’s analyst Moritz Kraemer told the conference.
That is “simply because of its very large financing requirements” which are, “with the current toolbox of safety nets that we have in Europe, beyond credible support,” he said.
Keeping Greece Afloat
European officials have injected billions of euros to keep Greece afloat and prevent contagion from spreading to larger euro-area countries such as Italy or Spain. The International Monetary Fund warned in a March 16 report that the Greek bailout held “exceptional risks” that could prompt a “disorderly” exit from monetary union unless additional help is mobilised.
For all the success of measures such as the ECB’s three-year provision of cash to euro-region banks, policy makers cannot afford to relax their efforts, said Kraemer.
“The job is not done,” he said. “The biggest mistake would be to fall into the trap of complacency.” While time is needed, “maybe the success of bringing yields down again has been too wide and too fast because it could discourage policy makers from continuing on the path of reform.”
European finance ministers are due to decide at a meeting on March 30-31 whether to augment the region’s crisis backstop. Germany, the biggest single contributor to euro-region bailouts, rejects raising the 500 billion-euro ceiling on the European Stability Mechanism, the permanent rescue fund.
Yet Chancellor Angela Merkel has left the door open to boosting the overall backstop limit, saying on March 16 that governments have discussed “combination possibilities” for the ESM, due to start up in July, and the existing European Financial Stability Facility.
“Running the two funds together temporarily is justifiable as a means to increase the firewall and would likely get support” in parliament from Merkel’s governing coalition, Norbert Barthle, the ranking Budget Committee lawmaker for her Christian Democrats, said in a phone interview. “The proposal is gathering momentum.”
Merkel’s government is working on a proposal for letting the two rescue funds run alongside each other, Die Welt newspaper reported today, citing euro-region officials it didn’t identify. The plan, which is still being discussed, may call for using structured financial products to boost the roughly 240 billion euros remaining in the EFSF, the newspaper said.
Schuknecht said euro-leaders have agreed to discuss “some possibly temporary increase” and “we have to wait” until the end of March. Policy makers must realize that large firewalls may undermine governments’ incentive to reduce debt, he said.
The same risk applies to joint euro-area bonds, Schuknecht said when asked whether Germany would ever endorse them. Merkel has ruled out jointly issued debt for the time being, saying it would divert from her drive to cut spending and debt across Europe.
“Germany cannot be liable for 9 trillion euros’ worth of debt,” Schuknecht said. “So my answer to this would be: ‘I hope never.’”
Erik F. Nielsen, global chief economist at UniCredit SpA, told the conference that Greece has become “irrelevant,” and growth in the euro area will be better next year. While Portugal may have to seek more aid, it will not have to follow Greece in seeking private-investor losses to restructure Portuguese debt, he said.
“For the next year or two the crisis has been resolved,” he said.