Pressure rises on divided eurozone to act on debt crisis

13th July 2011, Comments 0 comments

Divided European leaders faced on Wednesday an onslaught of demands for rapid action to fight the spreading eurozone debt crisis but Germany and France disagreed about calling an emergency summit.

In extraordinarily outspoken terms, the next head of the European Central Bank issued a blunt warning that the solvency of eurozone countries should not be taken for granted.

And Greece and Spain have attacked in equally blunt terms a German-led drive for private investors to shoulder part of the costs of a second rescue for Athens, widely expected to trigger a default status on Greek debt.

This critical matter, opposed by the ECB, is a factor behind turmoil on financial markets and has helped put Italy and Spain in the eurozone spotlight.

"The solvency of sovereign states is no longer to be taken for granted but has to be earned in the field with high and sustainable growth, which is only possible with public accounts in order," Italian central bank chief Mario Draghi, who takes over the ECB in November, said in a speech.

"The credibility credit given by stronger eurozone countries has expired. We have to grow without relying on it. Those structural reforms we have been calling for for years are now even more essential."

Markets steadied on Wednesday, but Irish debt was hit by a new downgrade to junk status.

"There is a real danger that the crisis will lead to a tidal wave which will spread, and we have to do everything in our power to prevent it," said Finnish Finance Minister Jutta Urpilainen.

With debt contagion engulfing Italy and Spain, the eurozone's third and fourth biggest economies, there was diplomatic talk of an emergency eurozone summit as early as Friday.

But disagreement on this was made public by the two pivotal eurozone and European Union countries, Germany and France.

France backed calls for a summit of the 17 eurozone leaders but Germany backed away, saying Chancellor Angela Merkel first wanted work on a second bailout of Greece to "continue at full speed."

A spokesman for European Union President Herman Van Rompuy said he would decide on whether to call a eurozone debt crisis summit "in due time."

Amid concerns the euro area's troubles could spread beyong its borders, British Prime Minister David Cameron told parliament: "Basically eurozone countries in my view have to recognise they have got to do more together faster, they have got to get ahead of the market rather than responding to the next crisis."

The head of the German central Bundesbank Jens Weidmann told Die Zeit newspaper: "To lift any uncertainty, eurozone member states must now, urgently, show they are able to act."

Ireland was the latest eurozone straggler to be hit by a credit ratings agency, as Moody's Investors Service downgraded its debt to "junk" status on Tuesday and warned it may also need a second bailout in 2013.

Irish borrowing rates soared to the highest levels since Dublin joined the eurozone. Rates for Italy and Spain have also risen to record high levels.

Italy, prodded by the IMF to take "decisive" action to cut its deficit, said its parliament would strengthen and adopt a four-year austerity budget by Friday.

Eurozone finance ministers pledged on Monday to strengthen the size and scope of a multi-billion-euro fund set up after Greece was rescued last year.

The new IMF chief Christine Lagarde said she was looking forward to "the prompt implementation of the important measures outlined" by the ministers.

The idea of allowing the fund to buy back Greece's mountain of debt, enabling the country to borrow at better rates on the markets, gained traction on Wednesday as Berlin suggested this was "possible."

But deep divisions remain on a new bailout for Greece expected to be almost as big as a 110-billion-euro ($154-billion) rescue agreed last year.

While Germany, Finland and the Netherlands are open to a selective default for Greece, expected to arise from private investor participation of about 30 billion euros in a rescue, several other eurozone nations oppose it.

The Greek government said it would not accept any form of default.

Spain has said it had always opposed the private involvement proposal and that the matter was not closed.

There is concern too about the impact of any default rating on European banks, and the European Union said it would support any EU banks failing stress tests on Friday.

Europe "must start speaking with one voice," said analyst Sony Kapoor, managing director of think-tank Re-Define. "Every new crisis headline fuels a further deterioration of the crisis and triggers more contagion."

© 2011 AFP

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