Europe divided over bonds, bailout fund boost

6th December 2010, Comments 0 comments

Deep divisions emerged Monday over a call to launch joint eurozone bonds as finance ministers locked horns with IMF head Dominique Strauss-Kahn in late-night talks.

Amid calls to boost their bailout war chest ahead of a summit of European Union leaders next week, analysts are convinced a trillion-dollar joint EU-IMF emergency fund for countries in financial disarray will need increasing amid expectations that Portugal will be next to tap it after Ireland.

But German Chancellor Angela Merkel made it clear she was not inclined to approve an increase in the fund at the moment.

In addition, she expressed fierce resistance to a plan to issue joint bonds, termed an "old idea" by European Commission chief Jose Manuel Barroso.

Yields on debt held by Portugal and other under-pressure eurozone economies fell last week, but the movement was attributed to a vast bond-buying spree launched by the European Central Bank.

Ten-year Spanish and Italian bond yields crept back up Monday, although still inside the level of interest rates the EU and IMF would demand.

Statements by leading EU figures and comment by analysts have raised the possibility of major changes to the way eurozone governments run their economic affairs.

As countries joined the eurozone they were supposed to apply disciplined policies aiming at convergence.

But these commitments have broken down as evidenced by rescues for Greece and Ireland, and the pressure on others.

Jean-Claude Juncker, head of the Eurogroup of finance ministers, and Giulio Tremonti, Italy's finance minister, want to introduce "E-bonds".

The pair told the Financial Times their plan would lead to a "liquid global market" that would help protect countries from speculation.

"This is not a crisis of the euro," Juncker later told Germany's SR television. "This is a crisis related to the debts of certain eurozone countries."

But Germany, Europe's biggest economy, flatly rejected the notion, with Merkel arguing that "competition on interest rates is an incentive to respect stability criteria."

Berlin fears joint bonds would raise its own borrowing costs and effectively force it to permanently subsidise the rest of a currency bloc, set to expand to 17 nations with Estonia's entry on January 1.

While Greek premier George Papandreou said the idea was worth discussing, Dutch finance minister Jan Kees de Jager likewise insisted: "It's easy to speculate on more rescue money and eurobonds, but I want to talk prevention now instead."

Euro partners have to commit to "rules with strictness for all, and exceptions for none," he underlined.

Of greater importance eventually, the European Union's economic affairs commissioner Olli Rehn implied, would be the debate on upgrading the bloc's existing 440-billion-euro contribution to the rescue fund.

Spanish Finance Minister Elena Salgado said International Monetary Fund managing director Strauss-Kahn would likely recommend an early increase -- before a permanent facility comes into being in mid-2013.

The current EU chair, Belgian Finance Minister Didier Reynders, wants Europe's fund increased substantially, even before then.

It should be endowed with "a huge amount of money, because if we don't do that you always have speculation," he said.

GFT analyst David Morrison said traders had "an expectation" that governments "will look to boost the EU-IMF bailout facility."

Ireland's 67.5 billion euros (90 billion dollars) in external loans and guarantees are due to be approved when the talks expand to include all EU nations on Tuesday, although domestic politics may interfere in the form of deep opposition to an austerity budget on Tuesday.


© 2010 AFP

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