Euro Chiefs Recommit to Crisis Plan as Talks Turn to Bank Policy

Euro Chiefs Recommit to Crisis Strategy as Global Markets Plunge
A customer uses an umbrella while using an automated teller machine (ATM) outside a Eurobank Ergasias SA branch in Athens. Photographer: Kostas Tsironis/Bloomberg

European governments recommitted to their recipe for fixing the economy, dismissing concerns that plummeting global markets would spark renewed turmoil in the crisis-hit euro zone.

Finance ministers demanded Greece meet targets for cutting public payrolls, ruled out easier bailout terms for Cyprus and set tight conditions on future aid for distressed banks, as northern countries led by Germany sought to limit the bill for fighting the more than three-year crisis.

Greece faces “no problem on the premise that we reach a final agreement on the review in July,” Dutch Finance Minister Jeroen Dijsselbloem told reporters late yesterday after chairing a euro-area meeting in Luxembourg. “The program is fully financed for at least another year.”

Finance chiefs from the 27-member European Union gathered today to complete a deal on rules for handling failing banks, talks that may extend into the early-morning hours.

Europe sent the stay-the-course message after the U.S. Federal Reserve said it’s prepared to phase out its unprecedented monetary stimulus. That raised the specter of the gradual withdrawal of the low-cost cash that markets have feasted on globally. Klaus Regling, head of the European Stability Mechanism, said the euro zone has withstood six weeks of rising global interest rates, with few signs of investors dumping the bonds of struggling countries to take refuge in German securities.

Bonds throughout Europe “moved more or less the same as the Netherlands and Germany,” Regling said. “We are moving here together. We are moving considerably less than the United States.”

Spanish Bonds

European markets didn’t behave that way yesterday. As German bonds fell, others fell further. Spain’s extra 10-year borrowing cost over German levels rose 21 basis points to 319 basis points, the highest in two months. Portugal’s 10-year yields jumped 34 basis points to 6.41 percent.

With Germany refusing to make new crisis-management concessions before national elections in September, the finance officials kept up the pressure on Greece to deliver on economic reforms in exchange for the next set of loans, due in July.

“There are points of concern that have to be watched,” French Finance Minister Pierre Moscovici said. “The Greek program is proceeding. We’re not developing catastrophic scenarios.”

Greece was thrown into political turmoil after two parties in the national unity coalition objected to Prime Minister Antonis Samaras’s decision to shut the state-owned broadcaster in order to meet job-cut targets imposed by creditors.

As Samaras struggled to keep the coalition together, his finance minister, Yannis Stournaras, predicted the tensions will pass.


“It’s not a political crisis, it’s turbulence,” Stournaras told reporters in Luxembourg.

Only three months after the 10 billion-euro Cypriot program was hashed out at late-night meetings on back-to-back weekends, President Nicos Anastasiades appeal for more lenient terms was rebuffed.

“There is no viable alternative to implementing the strategy 100 percent,” European Central Bank Executive Board member Joerg Asmussen said. Luxembourg Finance Minister Luc Frieden called it “the best solution for Cyprus.”

European officials continued to look at Ireland as the first crisis-management success story, saying it’s making progress toward being weaned off official aid. Ireland aims to return to full market financing at the end of the year.

Market Borrowing

Both Ireland and Portugal, seeking a program exit in early 2014, will win extra time to pay back their aid loans under a previously announced decision to be signed off today, Dijsselbloem said. He dangled unspecified “further measures of support” to smooth their way back to normal market borrowing.

The two countries could take up precautionary credit lines from the euro rescue fund, which would make them eligible to benefit from the “unlimited” bond-buying backstop announced last year by the ECB and not yet used.

The alliance of AAA rated creditors -- Germany, the Netherlands and Finland -- took steps to limit their liability for bank rescues in the future, insisting that their taxpayers’ money would be put up only as a last resort.

When the direct-recapitalization mechanism was first floated a year ago, European officials said it would spare governments from rescuing their own troubled banks, halting a vicious cycle that turned bank debt into sovereign debt.

Under plans discussed yesterday, however, the first responders to a bank failure would be the bank’s creditors and national government. Once the euro rescue fund gets involved, the national government would still bear at least 20 percent of the costs.

Problem Banks

The German approach came closer to the treatment of Cyprus, where bank depositors were taxed, than to the path taken by Ireland, Spain and the Netherlands.

The rescue fund’s overall exposure to problem banks throughout Europe at 60 billion euros out of its total 500 billion euros, the finance ministers said. Direct aid wouldn’t flow until the ECB starts operating as a bank supervisor, possibly not until late 2014.

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