Germany puts foot down on plan to issue common bonds
Angela Merkel rules out common bonds as 'illegal' under EU treaties and insists €750bn rescue fund is big enough
Published 07/12/2010 | 05:00
GERMANY put its foot down yesterday over calls to issue common eurobonds or to increase the size of the eurozone's bailout fund as finance ministers argued over how best to halt the sovereign debt crisis that threatens the single currency.
Backed up by a report from the IMF, two key figures from European Union founder-- member nations led the charge in Brussels for ever-greater help-me-outs, which inevitably would involve increased costs for the German taxpayer.
But Angela Merkel ruled out common bonds as "illegal" under EU treaties and insisted that the e750bn rescue fund was big enough. The German Chancellor has resisted bailouts at every step since the Greek economy imploded at the start of the year, but she is facing a growing chorus of smaller nations demanding extra measures to pacify the markets.
It was another tough day for the euro, eurozone sovereign bonds and European bank shares, with the single currency falling against the pound and dollar, while yields on Irish, Italian, Portuguese and Spanish bonds all rose slightly. The European Central Bank said that it had spent e1.965bn buying government bonds last week, up from e1.345bn the previous week.
This brought a mini-bounce to the euro on Friday, but the level of dissent at last night's eurozone finance ministers' meeting in Brussels will do little to restore calm.
Jean-Claude Juncker, Luxembourg's long-serving prime minister and chair of the eurogroup, joined the Italian Finance Minister Giulio Tremonti to call for the issuance of joint European sovereign bonds -- or "E-bonds" -- to assert the "irreversibility of the euro".
The pair said that a European Debt Agency that could issue such bonds would be possible as early as this month if the body that represents member states endorsed it. Such an agency eventually could issue bonds worth up to 40pc of EU economic output, they suggested. It should finance 50pc of all bonds sold by EU states and -- in cases where debt markets seize up, as they have in recent weeks for countries such as Ireland and Portugal -- it could fund the entire bond issue.
Padhraic Garvey of ING in the Netherlands told the Irish Indepedent the idea has been floated in the past and was rubbished but said that some form of common debt for Europe is now a realistic prospect.
He said the plan by the European Financial Stabilisation Fund (EFSF) to issue debt to fund the Irish bailout already points the way to new forms of debt.
"The EFSF plan to issue bonds could morph into common bond issuance," he said. Politicians that previously rejected the idea out of hand are now considering it in more detail, he said.
The devil is likely to be in such detail -- in particular trying to determine the different rates countries would access the bonds at once they were raised.
Mrs Merkel's response was terse: "It is our firm conviction that the treaties do not allow joint eurobonds, that is no universal interest rate for all European member states.
Competition on interest rates is an incentive to respect stability criteria."
Richer countries are opposed to the plan which could see them pay extra for government debt if they have to borrow alongside less well regarded credits.
The interest rate on pan-European bonds would certainly be higher than that paid by Germany at the moment because it would price in the risk of default of poorer governments.
Mrs Merkel added that at present she did not see a need to boost the existing bailout fund. That ran counter to an IMF report, which argued there was a "strong case" for boosting the size of the EU/IMF rescue facility and using the funds more flexibly, including to support banks.
Her comments ran counter to an IMF report, which argued there was a "strong case" for boosting the size of the EU/IMF rescue facility and using the funds more flexibly, including to support banks.
It came as Harvard University Professor Kenneth Rogoff said Europe's debt crisis will probably result in bond restructurings in Greece, Ireland and Portugal.