EU needs 'courage' to set limits on markets: Merkel

24th November 2010, Comments 0 comments

German Chancellor Angela Merkel said Wednesday that Europe should have the courage to set limits on markets by ensuring that private investors bear some of the risk of future eurozone bailouts.

"Do politicians have the courage to also make those who earn a profit take some of the risk?" Merkel said in a speech to parliament. "This is about the primacy of governments, about setting limits on markets."

With its banking system in dire straits and its budget deficit forecast to be 10 times the EU limit this year, Ireland on Sunday became the second eurozone member in six months to apply for a bailout after Greece.

The rates Spain has to pay to borrow fresh money jumped sharply on Wednesday as debt strains show signs of spreading from Ireland, while in Portugal workers staged a strike in protest at government austerity measures.

Merkel said that Germany would look "positively" on Ireland's request, reportedly worth some 85 billion euros (114 billion dollars), while Foreign Minister Guido Westerwelle said he saw no danger of contagion.

The European Commission distanced itself Wednesday from remarks by Germany's finance minister, Wolfgang Schaeuble, made on Tuesday that the euro was "at stake."

The chancellor, facing unease from voters and newspapers to bailing out other countries, has convinced other countries on the need for tougher rules for those countries which breach EU fiscal rules.

She also has to be wary of the constitutional court, which is yet to rule on the validity of the German contribution to the Greek bailout and is likely to pore over at any Irish aid and whether it is compatible with German law.

Ireland is expected to tap the 750-billion-euro rescue vehicle know as the European Financial Stability Facility (EFSF) hurriedly cobbled together earlier this year by eurozone governments and the International Monetary Fund.

When the EFSF expires in June 2013, Germany is keen to see it replaced by a permanent mechanism, and Merkel wants private investors, not just taxpayers, to share some of the risk on bonds sold by eurozone governments.

A government paper seen by AFP said that Germany was proposing that new bonds carry "Collective Action Clauses."

These would state that in the event of a restructuring of a bond, investors should suffer a cut in the yield, a change in the maturity and/or a "haircut" -- meaning that investors in their bonds would not be repaid in full.

"The markets, as they are so wonderfully called, are unsettled when one says something like that," Merkel said on Wednesday.

"This is quite a crucial question. We often said at the start of the (financial) crisis that it cannot be that governments do not call the shots ... This is exactly what the issue is now."

Merkel's initial proposals to this end were however "clumsy," said Jane Foley, senior currency strategist at Rabobank, leaving investors thinking mistakenly that they applied to bonds already issued, instead of from 2013.

But the chancellor will get her way, Foley believes.

"In principle most people will agree with Merkel, that ultimately when you buy a bond you have to take on some degree of risk," she told AFP.

© 2010 AFP

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