European Officials Split Over Fund Increase, Joint Bond Plan

Monday, 06 Dec 2010 07:16 AM

 

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European officials voiced divisions over the steps needed to stop the sovereign debt crisis as Germany opposes increasing the 750 billion-euro ($1 trillion) bailout fund and the introduction of join European bonds.

Belgian Finance Minister Didier Reynders told reporters on Dec. 4 that the fund might be expanded if ministers decide to introduce a larger permanent facility when the current temporary one expires, breaking ranks with German Chancellor Angela Merkel and France’s Nicolas Sarkozy. Luxembourg and Italy today called for the creation of joint European bonds, a move rebuffed by Germany Finance Minister Wolfgang Schaeuble.

European policy makers head to Brussels today for a regular meeting on concern their rescue fund may not be large enough to stop contagion spreading from Greece and Ireland to Spain. While Sarkozy and Merkel last month rejected expanding the fund, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider such a move.

The euro halted a three-session rally today, dipping 0.5 percent to $1.3349 as of 8:25 a.m. in Frankfurt.

European Union leaders last month agreed on a mechanism to smooth bond restructurings after 2013 when the European Financial Stability Facility will be replaced with the so-called European Stability Mechanism. Investors speculate that debt- strapped nations won’t be able to cut deficits fast enough.

IMF Support

“We need to increase the total amount of money for the permanent mechanism coming into 2013,” said Reynders. “If it is possible to organize it earlier, why not?”

Reynders, whose country holds the rotating EU presidency until the end of this year, made the remarks in Brussels after Belgian bond spreads jumped to the highest in at least 17 years.

“For the moment, I ask to think about a permanent mechanism with a larger size,” he said. The International Monetary Fund “is in favor of a larger mechanism. They are ready to follow the process if we decide in Europe.”

IMF spokesman William Murray declined to comment. Managing Director Dominique Strauss-Kahn is scheduled to join today’s regular meeting of euro-region finance ministers.

The IMF will ask the EU to enlarge the bloc’s rescue package, Reuters reported yesterday, citing an IMF report it obtained. The Washington-based fund will also recommend that the ECB buys more government bonds, Reuters said.

Today’s meeting comes after Luxembourg Finance Minister Jean-Claude Juncker and Italian counterpart Giulio Tremonti wrote a letter to the FT calling for the introduction of a joint European government bond.

German Opposition

“E-Bonds” would be sold by a European Debt Agency, which could be created as early as this month and finance as much as 50 percent of the issuances by EU members to create a deep market, they said. A switch would also be offered between E- Bonds and current government bonds.

German Deputy Finance Minister Joerg Asmussen on Dec. 3 rejected such a move because it wouldn’t encourage countries to fix their finances.

“As long as we have a national competence for fiscal policy, we cannot give up the instruments for incentives and sanctions for members of the eurozone,” Schaeuble said in an interview with the FT today.

European officials are today set to approve Ireland’s 85 billion-euro bailout to help stabilize the country’s banking system and push down the budget deficit. Reynders said ministers will also discuss the outlook for Portugal, which is struggling to quash speculation it will also need external aid.

Portugal ‘Remedy’

“I said two weeks ago that it’s quite needed for Ireland to ask for help,” he said. “We need now to find a remedy for Portugal to see is it necessary or not, but to avoid the contagion. We will follow that in the next weeks and months.”

Trichet last week called on political leaders to do more to fix their budgets and stamp out a sovereign debt crisis that’s ricocheted through European markets for more than a year. Asked about increasing the size of the cash pool on Dec. 3, he said “they must go as far as possible and be as effective as possible.” The ECB last week was forced to step up bond purchases to fight the turmoil.

The extra yield that investors demand to hold Portuguese 10-year bonds over German bunds on Dec. 3 fell below 300 basis points for the first time since August after touching 428 basis points on Nov. 29. In Belgium, the premium on 10-year bonds rose to 133 basis points on Nov. 30.

“We expect that after another round of market tensions, the European fiscal policy makers will eventually come up with additional measures to fight the crisis,” Citigroup Inc. economists including Juergen Michels and Michael Saunders in London said in an e-mailed note on Dec. 3. “As the ECB is the only institution with a large and credible financial room, we expect that eventually the ECB will be forced to increase its contribution to the rescue packages substantially.”

Taking Steps

French Finance Minister Christine Lagarde said today that “we have taken steps within euro-zone to address this issue with massive funding and what our leaders have said is that we shall defend the euro,” in a speech on a visit to New Delhi.

“The difficulty we have is like other countries in Europe: we need to solve the problem of contagion coming from Greece, Ireland and maybe now Portugal,” Reynders said. “We don’t have any real problem in Belgium for the moment like that.”

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