Thursday, December 16, 2010

European debt dilemma

European debt crisis divides leaders

No big developments expected from 2-day Brussels meeting

Last Updated: Thursday, December 16, 2010 | 9:36 AM ET 

German Chancellor Angela Merkel opposes plans to increase the eurozone bailout fund or issue pan-European bonds, two ideas under consideration to raise money to back weak countries.German Chancellor Angela Merkel opposes plans to increase the eurozone bailout fund or issue pan-European bonds, two ideas under consideration to raise money to back weak countries. (Thomas Peter/Reuters)
Disagreement over how to fight Europe's debt crisis deepened as leaders headed into a two-day summit in Brussels and uncertainty fuelled investors' concerns once again.
Amid the political deadlock, the effects of the crisis rang out across the region.
Spain went to the bond market Thursday with an auction that led to higher borrowing costs, a day after rating agency Moody's warned it may downgrade the country's debt. Many economists say Spain is too big to be bailed out the way smaller Ireland and Greece have been.
The Spanish treasury sold 1.8 billion euros in 10-year bonds at an average interest rate of 5.4 per cent, up from 4.6 per cent in the last such auction Nov. 18. It was obliged to pay a rate of six per cent to sell 618 million euros in 15-year bonds, up from 4.5 per cent in October.
On Wednesday, violent protests shook Athens as rioters smashed cars and hurled gasoline bombs at police during a nationwide general strike.
Still, the meeting of European Union heads of state and government Thursday and Friday is not expected to result in any new shock-and-awe decisions to contain the smouldering debt crisis.
Instead it will focus on a small change to EU treaties to set up a new crisis mechanism agreed almost two months ago.
But the pressure on European policymakers to find a way out of the debt crisis remains high. Many economists warn that weak growth, paired with worries over the health of the banks, has made the debt loads of countries like Greece, Portugal and Ireland unsustainable.
Concern that they won't pay back their creditors has rocked bond markets and pulled down the value of the euro.
Calls for bolder actions, either increasing the eurozone's 750-billion euro ($1-trillion) bailout fund or creating pan-European bonds to boost confidence in the euro, were nevertheless growing louder.

Most ardent opponent

German Chancellor Angela Merkel — so far the most ardent opponent of both proposals — has been attacked by the country's biggest opposition party.
In an opinion piece in the Financial Times, the parliamentary leader of the Social Democrats, Frank-Walter Steinmeier, and Peer Steinbrueck, Germany's former finance minister, said a "more radical, targeted effort to end the current uncertainty" was necessary.
They called for a partial restructuring of the debts of Greece, Ireland and Portugal, guarantees for the bonds of stable countries, and the limited introduction of pan-European bonds.
One idea to increase the firing power of the bailout fund would see eurozone countries boost their guarantees for the region's portion of the fund. Eurozone governments have promised to guarantee 440 billion euros in bonds that can be issued to help states that run out of money.
The remaining 310 billion euros would come from the EU's executive commission and the International Monetary Fund.
However, to get a triple-A rating for those bonds — necessary to make them attractive to investors — governments had to guarantee 120 per cent of the actual loan value, which means that of the 440 billion euros, only about 366.7 billion euros can be lent to distressed governments.
Extending government guarantees to lift the fund's lending capacity to the actual 440 billion euros — the figure that has been quoted throughout the crisis — might help to ease some concern over the financial standing of Spain, Europe's fourth largest economy.

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