Europeans Clash on Bailout
BERLIN—European leaders sparred over whether to commit more funds to rescue struggling euro-zone countries, as financial-market pressure on the region’s weakest economies intensified.
The European Union’s executive arm, the Brussels-based EU Commission, floated a proposal on Wednesday to double the size of Europe’s €440 billion ($588 billion) bailout fund for euro-zone governments, but the idea was dismissed by Germany, according to people familiar with the situation.
The disagreement between Brussels and Berlin comes amid growing fears that the crisis of investor confidence in euro-zone governments, which has already forced Greece and Ireland to seek international bailouts, could expand sooner or later to Portugal and Spain.
Many investors and analysts doubt whether the EU has agreed to supply enough financing to rescue Spain if the country were to lose access to bond markets. Support from Germany, Europe’s largest economy and biggest contributor to the EU’s main bailout fund, would be essential for any funding increase.
Following Greece’s €110 billion bailout in May, the EU set up a €750 billion rescue program together with the International Monetary Fund. The centerpiece of that effort is the European Financial Stability Facility, or EFSF, which euro-zone countries agreed to support with up to €440 billion in credit guarantees. The remaining contributions would come from the IMF and the EU Commission.
European officials said the Commission’s position was that Portugal and Spain can get by without a bailout. A spokesman for the Commission said it is “absolutely not true” that it is proposing a doubling or an expansion of the bailout fund.
But other European sources say the Commission did float a plan to increase the capacity of the EFSF, and that it was quickly dismissed by Berlin.
Germany’s top central banker, Bundesbank President Axel Weber, hinted at the discussions going on behind the scenes when he said on Wednesday that euro-zone governments would expand the EFSF if necessary.
The German government viewed Mr. Weber’s comments as badly timed, and has told the Commission that the EFSF has plenty of funds at its disposal already, according to a person familiar with the matter.
Referring to the EFSF in a speech on Thursday, German Chancellor Angela Merkel said: “Everything will remain as it has been agreed to.”
Ms. Merkel and French President Nicolas Sarkozy discussed the euro zone’s crisis in a phone call late Thursday, a spokesman for the chancellor said. The leaders agreed that talks over aid for Ireland should come to a swift conclusion, and praised the Irish government’s plan to cut its budget deficit. They also stressed that the existing European bailout plan will remain unchanged through 2013, the spokesman said.
Fears that Ireland’s debt and banking crisis could spread to Spain continued to weigh on European markets on Thursday. The bond markets of Europe’s weaker economies showed further signs of stress, keeping these countries’ borrowing costs elevated. Traders speculated that the European Central Bank was partly counteracting the trend, by buying bonds as part of its emergency program to support the market.
The premium that Spain has to pay to attract investors, compared with the rate paid by Germany, considered the euro zone’s safest borrower, continued its climb, reaching nearly 2.5 percentage points on Thursday.
The cost of insuring Spain’s debt against the risk of default hit a fresh closing record on Thursday: It now costs $301,000 a year to protect $10 million of Spanish government debt for five years, according to data provider Markit.
However, the euro edged higher to $1.3378 on Thursday after Bundesbank’s Mr. Weber reaffirmed Europe’s commitment to its single currency and insisted that the bailout facilities were already big enough to cope with any likely scenario.
Spain accounts for about 10% of all economic activity in the 16-nation euro area, making it potentially far more expensive to rescue than Portugal, Ireland or Greece, the other euro-zone countries with the most acute debt problems. Unlike Ireland and Greece, Spain hasn’t lost access to bond markets, but its borrowing costs have risen sharply due to investors’ growing caution about buying the debt of any countries on the euro zone’s struggling periphery.
Although the combined EU-IMF bailout system was billed as a €750 package, its effective lending capacity could be reduced to around €530 billion if Portugal and Spain were to join Ireland in needing a bailout.
The more countries that need help, the fewer that can offer guarantees. In addition, the EFSF’s total borrowing has to remain below the sum of its credit guarantees, so that EFSF bonds are seen as safe enough to attain a coveted triple-A credit rating. The EFSF is a Luxembourg-registered company that can issue bonds backed by credit guarantees from Germany and other solvent euro-zone countries.
Doubling the EFSF’s capacity would remove any doubt about whether the facility has enough firepower to prop up Spain if the country’s government can’t fund itself in bond markets.
But such a move likely would draw fire in Germany. Many German lawmakers and voters already are unhappy about putting taxpayers’ money at risk to save euro-zone countries that have run into trouble because of unsustainable borrowing. Increasing Germany’s commitments could prove politically costly for Ms. Merkel’s government, which faces a string of important regional elections next year.
Ireland became the first country to apply for help from the EFSF last week. It is negotiating a bailout package from Europe and the IMF that is expected to total roughly €85 billion.
Under a political understanding between the EU and the Washington-based IMF, the latter would lend roughly half as much money to crisis-hit euro members as the EU.
Germany and other euro members have made the granting of loans from the EFSF conditional on the IMF also being involved in any bailouts.
Neil Shah and Patrick McGroarty contributed to this article.
By MARCUS WALKER And MATTHEW KARNITSCHNIG
NOVEMBER 24, 2010
Source: The Wall Street Journal