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Monti Bets on Banking License for Rescue Fund in Poke at Germany

Monti Says He Won't Serve Beyond End of Term Next Year
Mario Monti, Italy's prime minister, in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s Prime Minister Mario Monti said the permanent rescue fund will gain access to European Central Bank liquidity via a bank license, challenging German policy makers to back more actions to tame the euro-area crisis.

“I think this would help, I think this will in due course occur,” Monti said in Helsinki yesterday at a news conference with Finnish Prime Minister Jyrki Katainen. Monti’s assertion was a rebuff to Chancellor Angela Merkel’s Cabinet hours after ministers meeting in Berlin hardened their opposition to granting the planned bailout fund access to the ECB’s resources.

Monti is prodding colleagues across Europe to back his fight to lower the borrowing costs that investors are imposing on Italy and Spain. In travels from Paris to Helsinki and on to Madrid today, where he will meet with Spanish Prime Minister Mariano Rajoy, Monti is seeking to bridge a north-south divide on crisis fighting and capitalize on a pledge by ECB President Mario Draghi to do whatever it takes to defend the euro.

Monti and Katainen both declined to say what they wanted to hear from Draghi today after a meeting of ECB policy makers, with the Italian premier urging central bankers to show equal respect for ECB independence.

He spoke after Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its inflation-fighting mandate and stressed Germany’s importance in setting common strategy in the 17-nation euro area, according to an interview conducted in June and posted on the Bundesbank’s website yesterday.

‘Degree of Respect’

“I only wish by the way that all components within the European system of central banks displayed the same degree of respect for the independence of the ECB as heads of governments do,” Monti told reporters.

Almost three years since the sovereign debt crisis surfaced in Greece, Monti is leading efforts to coax Europe into strengthening its bailout capacity and help lower bond yields that have surged to euro-era records. President Barack Obama called Monti July 30 and “reiterated his support for decisive action to resolve the crisis,” according to a White House statement.

German benchmark bunds fell yesterday, with 10-year yields rising the most in a month to 1.37 percent, as demand for safety eased. Italy’s 10 year-bond yield fell 15 basis points to 5.93 percent at 6:06 p.m. in Rome. That’s still more than 1 percentage point higher than in early March and 464 basis points more than similar-maturity German debt. Spain’s 10-year bond yield fell 2 basis points to 6.73 percent.

German Stomach

“The question is whether the Germans and the Finns have the stomach for a much looser ECB policy that is more suited to the south, and so far we haven’t seen much appetite for that,” Jonathan Tepper, a partner at London-based investment research firm Variant Perception, said by phone. “Neither seems to want to budge.”

Italy might want Europe’s rescue funds and the ECB to buy its bonds, Monti told Finnish newspaper Helsingin Sanomat in an interview, stressing that the country doesn’t need a bailout. “We’re thinking of a possible intervention in various combinations,” involving the temporary rescue fund, the permanent European Stability Mechanism and the ECB, he said.

Markets are awaiting the establishment of the 500 billion-euro ($615 billion) ESM, which is on hold pending a decision by Germany’s Federal Constitutional Court, set for Sept. 12.

While Monti has found common cause on stepping up efforts to resolve the crisis with Rajoy of Spain and French President Francois Hollande, leaders in Germany and Finland have proven less willing to commit more help.

Berlin Cabinet

Merkel and her Cabinet ministers ruled out any move to grant the ESM a banking license, a proposal that would allow the fund to wield unlimited firepower, Economy Minister Philipp Roesler said.

“The chancellor and we have discussed it and we are united that a bank license cannot be our way,” Roesler, who is also vice chancellor, told reporters in Berlin after he stood in for Merkel at the weekly Cabinet meeting. Merkel is on vacation. “Fiscal discipline and economic reforms have to be the way forward,” Roesler said. “Other ways are not suitable.”

Leaders in AAA rated Finland, the northernmost euro member, have been no more accommodating. Finland demanded collateral for Greece’s second bailout last year and has since insisted it will only contribute to Spain’s banking rescue if it gets similar security. Finland also wants rescue funds to come with strict terms such as austerity and burden sharing for bondholders.

‘Very Critical’

“We have been very critical on secondary market operations by rescue funds as we don’t believe that’s the right way to use money,” Katainen said. Still, he said the situation in the sovereign bond markets is “not normal,” and “some sort of European solution” was needed.

The past month has seen some evidence of a rapprochement between northern and southern euro members, with German Finance Minister Wolfgang Schaeuble voicing his support for Spain’s austerity drive after Rajoy unveiled a fourth package of cuts since taking office in December.

Monti and Merkel are both pushing for rapid implementation of a June European summit agreement that would ease the purchase of distressed sovereign debt by the region’s rescue funds. He and Merkel agreed the decisions must be put in place “as quickly as possible” after speaking by phone on July 28.

Katainen, describing his meeting with Monti as “extraordinary,” called for more time to assess what countries have done to reform their economies. Monti, praising Finland as an example to Italy, said while policy makers must tackle bond spreads, “we must by all means avoid spreads between mentalities and spreads between feelings” in Europe.

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