Irish Vote on Budget as EU Says Crisis Pot Is Enough

Tuesday, 07 Dec 2010 04:00 PM

 

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The European Union insisted its bailout pot has enough money to handle the continent's government debt crisis — but conceded its earlier bank stress tests were not tough enough and that Greece will need more time to repay its bailout loans.

While EU officials in Brussels sought to calm markets by stressing that their anti-crisis measures were enough to support the euro's credibility, the government in bailed-out Ireland announced a brutally tight budget and more taxes for next year as protesters banged drums and blew whistes outside parliament's gates.

Germany, the euro's economic and financial heavyweight, is refusing to increase the 750 billion euro ($1 trillion) financial backstop set up to help euro members that run out of money, and the Netherlands and Austria are backing Berlin on that.

The three — among the euro governments with still-solid finances — are also against proposals to go even further and start a pan-European bond to help governments borrow more money.

Instead, Germany says it's now time to implement the decisions taken in recent months — agreements for governments to cut back, toughen rules against overspending, and set up new bailout rules that in some cases could ask bondholders to take losses.

"It doesn't make sense to constantly start new debates," said German Finance Minister Wolfgang Schaeuble following a two-day meeting with his European counterparts.

European governments are struggling to keep government finances in several heavily indebted countries from collapsing. Jittery bond investors have been raising the interest rates they demand to loan to those countries as the dire state of their finances has become clearer. Ireland and Greece were bailed out after rising bond interest yields effectively shut them out of credit markets.

The pressure on the EU's finance ministers has abated somewhat as the euro has recovered much of its lost ground and the cost of borrowing in countries like Portugal has come down from record euro-era highs. Despite that recent stabilization, market interest rates remain prohibitively high.

Given the refusal of a number of countries to back fresh "shock and awe" measures — raising the ante by putting up new money to deal with the crisis — the EU is now counting on highly indebted states like Ireland, Spain and Portugal to press ahead with deep austerity measures.

Meanwhile, the EU is working to boost confidence in the banks, which hold much of the bonds from shaky governments.

As a result, it decided to conduct a new round of stress tests on Europe's banks from February.

Olli Rehn, the top monetary official in the EU, said these will be "more rigorous and more comprehensive" than those conducted on 91 banks in July and will crucially assess a bank's ability to access money quickly under stress. The earlier version did not assess this liquidity position.

July's stress tests have come under criticism after the bailout of Ireland last month was predicated largely on revelations of worse financial problems afflicting its banks. All the Irish banks assessed in July were given a clean bill of health as only seven of the 91 banks tested failed.

As a result, investors continue to fret about the health of many of Europe's financial institutions and how they affect governments' potential liabilities.

Many analysts have warned that the region's existing emergency rescue fund would be too small to save Spain, Europe's third largest economy.

Even Dominique Strauss-Kahn, the head of the International Monetary Fund, weighed into the debate Tuesday during a visit in Greece, arguing that Europe needs to find a "comprehensive solution" to the debt crisis rather than dealing with every country on a case-by-case basis. The IMF's voice will be heard loud and clear as it is contributing a third of both the rescue loans to Greece and the big bailout fund.

Strauss-Kahn warned "there is a risk of big difficulties" because of the differences in growth between the members of the eurozone. The weaker ones need more growth to be able to pay their debts, yet all the cutbacks undermine growth by withdrawing the stimulus of government spending from the economy.

He said the IMF was backing more time for Greece to pay back its 110 billion euro bailout loans, and EU officials indicated they would too.

European officials say they will deal with future crises, as long as governments shape up their finances.

"The best defense against any contagion effect is improving our budgetary positions to meet the agreed fiscal targets and reduce public debt," Rehn said.

In Dublin, parliament is due to vote Tuesday night on the budget for next year — the measures proposed by the Irish government are the harshest in the country's history but are required in return for a 67.5 billion euro rescue package.

For many of the bloc's ministers, that's far more important than increasing the size of Europe's bailout funds.

"If we are not addressing the long-term and midterm solutions as well, the markets will never be able to completely restore the confidence they have into the eurozone," said Dutch Finance Minister Jan Kees de Jager.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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