Pressure rises on Germany in eurozone debt crisis

14th July 2011, Comments 0 comments

Pressure on Germany to give ground in the Greek debt crisis was rising on Thursday as the eurozone drama, coupled with a warning of a US debt downgrade, deepened tension on global markets

Italy responded to the rapidly rising dangers of debt contagion in the last few days by racing to approve radical budget cuts to prevent its economy, the third-biggest in the eurozone, from being dragged down.

Ratings agency Fitch affirmed Italy's "AA-" credit rating, but downgraded Greece by three points to "CCC" from its previous rating of "B+".

That was the second rating blow to eurozone weaklings in 24 hours after a junk status downgrade for Ireland.

Fitch said it had made the downgrade because the urgency of organising a second rescue for Greece would have merited a plan from the European Union and International Monetary Fund at the beginning of July, and because of uncertainty over any contribution from private investors.

Berenberg Bank chief eurozone economist Holger Schmieding warned that "markets are anxiously waiting for policy makers to resolve their differences."

Schmieding stressed that "the dispute between finance ministers and central bankers is dangerous."

He said: "Hyper-nervous investors need to be re-assured that there will be a solution soon and that the most important policy makers, namely the major paymasters and the ECB -- put differently: Berlin and Frankfurt -- back the solution."

A critical proposal, led by Germany, which is dividing eurozone governments and is driving turmoil on financial markets is for private holders of bonds to shoulder part of the costs of a second rescue for Greece worth about 110 billion euros ($156 billion). The IMF has given support to this.

But there was a sign that Germany might be preparing to back down, in the form of a report in business daily Handelsblatt that the government had dropped this demand.

Handelsblatt quoted a finance ministry representative as saying: "As things stand, such an undertaking is highly unlikely."

The ministry has suggested a possible way forward could be to use funds from the European Financial Stability Facility (EFSF) to buy Greek debt on financial markets, taking advantage of sharp discounts to then cancel the debt.

Spain's finance minister said that pushing for private sector involvement was "not a good idea."

Leading figures at the European Central Bank (ECB), which is strongly opposed to involving the private sector because it would probably trigger a default rating, urged the eurozone to get moving on a solution.

Meanwhile, Moody's rating agency placed the United States's triple-A debt on a downgrade watch on Wednesday because of rising prospects the US debt limit would not be raised in time to avoid default.

The string of warnings from rating agencies on eurozone and US debt came after days of attacks on them from leading EU figures for the content and timing of their assessments.

Many voices, particularly from financial markets, have expressed deep dismay at the confusion and contradictions in the handling of the eurozone crisis and the contagion it is spreading.

Germany appeared to get support however from the IMF, which said that "comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing."

But Spanish Finance Minister Elena Salgado told the German newspaper Sueddeutsche Zeitung: "We always said we had to be careful ... that the participation by the private sector in resolving the Greek problem was not a good idea.

"Debate over this question is one of the reasons for tensions on financial markets and it must be clarified as soon as possible," she added.

Barclays Capital economist Thorsten Polleit told AFP: "Investors have become increasingly aware that there is no easy and quick way out in economic and political terms."

German central bank president Jens Weidmann is opposed to the use of EFSF funds to buy Greek debt, and has reiterated that the ECB could not accept Greek debt as collateral for loans if the country defaulted on its debt.

Weidmann told the newspaper Die Zeit this week: "Containment of the crisis shold not mean that we undermine our principles. We must draw a red line."

Italian central bank head Mario Draghi, who will take over as ECB president in November, has warned that a definitive plan is needed quickly, echoing the position of Greek Prime Minister Georges Papandreou.

European Union president Herman Van Rompuy and France have pushed for a crisis summit in the coming days, but Germany holds that an emergency meeting without concrete results would be worse than not holding one at all.

The eurozone is bracing meanwhile for the release on Friday of bank stress tests that are supposed to demonstrate to financial markets that most banks are strong enough to weather fresh shocks.

© 2011 AFP

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