Thursday 8 December 2016

France and Germany to hang together as eurobond pressure rises

ECB spent €14.29bn buying up bonds of unidentified nations last week in its latest attempt to steady markets

Emmet Oliver

Published 23/08/2011 | 05:00

German chancellor Angela Merkel speaking in Berlin yesterday
German chancellor Angela Merkel speaking in Berlin yesterday

Germany and France will meet today for fresh discussions about the eurozone debt crisis as pressure continues to pile on both countries on the issue of eurobonds.

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Meanwhile, the ECB has revealed it spent €14.29bn buying up European bonds last week in its latest attempt to steady European bond markets.

The names of the countries were not revealed, but most observers believe the countries were Italy and Spain.

Hopes that Fed chairman Ben Bernanke will step towards another round of money printing (quantitative easing) during a speech on Friday boosted equity markets however.

German Finance Minister Wolfgang Schauble is to meet French counterpart Francois Baroin today to discuss the crisis and to propose remedies such as a tax on financial transactions. Ms Merkel attempted to shut the door on common euro-area bonds as a means to solve the debt crisis over the last two days, saying she wouldn't let financial markets dictate policy.

However, the EU Commission has not ruled out legislating for eurobonds, putting the EU's executive arm on a collision course with Merkel on the issue. It came as the Bundesbank criticised Merkel for agreeing to a package on July 21 in Brussels. The bank said this deal would leave all European states liable for each others' debts.

The European Commission said yesterday it may present draft legislation on euro bonds when completing a report on the feasibility of the idea.

"The report will, if appropriate, be accompanied by legislative proposals," EU economic and monetary affairs commissioner Olli Rehn said.

While Ms Merkel remains totally opposed to eurobonds, other commentators believe if she does not agree to the idea, a smaller "core" euro will emerge, led by Germany and a smaller group of economies.

Peripheral countries like Ireland, Portugal and Greece in that case would have to leave the zone.

That was the prediction yesterday by Mohammed El Erian, chief executive of Pimco, the world's largest bond fund.

The crisis deepened yesterday as concern lingered over Finland's insistence that any aid it gives Greece be accompanied by collateral agreements.

The Finns want the Greeks to deposit money into a bank account, as a form of security.

Rating agency Moody's said this would be negative for the credit ratings of Greece and other troubled eurozone states, potentially including Ireland.

The agency also said such deals showed a lack of will in some eurozone countries that put more pressure on Germany and France to take stronger steps to support the euro project.

Austria, the Netherlands and Slovakia said on Friday they wanted collateral on their loans to Greece after Finland secured such a commitment, but Greek officials have said they were not talking to countries other than Finland about this type of plan.

Meanwhile, US prime money market funds are reducing their exposure to European banks, according to a report published yesterday by the Fitch ratings agency, amid growing concern about their ability to find financing.

The funds, which loan cash on a short-term basis to financial institutions, governments and companies, reduced their exposure to European banks in dollar terms at the end of July by 9pc from the end of June.

The reduction was 20.4pc from the end of May. Meanwhile, Greece's finance minister said yesterday that the crisis-afflicted economy will shrink more than expected this year, putting further pressure on the country's ambitious deficit-cutting effort.

Evangelos Venizelos said the ministry forecasts annual output to shrink in 2011 between 4.5pc and 5.3pc of gross domestic product.

Mr Venizelos had previously admitted that the recession might be over last year's 4.5pc, a whole percentage point worse than initially estimated.

The government has forecast a timid return to growth in 2012, but that now seems very unrealistic. "All the measures we are taking ... are aimed to stem the recession," he said.

Irish Independent

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