Tuesday 24 October 2017

Merkel: EU debt rules will have ‘more bite’

Angela Merkel: stepping up demands for investors to help pay for any future European debt crisis. Photo: Getty Images
Angela Merkel: stepping up demands for investors to help pay for any future European debt crisis. Photo: Getty Images

German Chancellor Angela Merkel stepped up demands for investors to help pay for any future European debt crisis, offering no respite to euro-region countries whose bond yields are soaring.

Measures being drafted by the European Union will result in rules with “more bite” to protect the euro, Merkel said in a speech today in Bruges, Belgium.

Along with steps to prevent EU members running up excessive debt, a crisis mechanism enshrined in EU treaties is necessary for the longer term, she said.

“We will set it up in such a way that European taxpayers will no longer be on the hook for possible new mistakes and turmoil on the financial markets,” Merkel said. “Private investors must also make a contribution.”

European officials including Spanish Prime Minister Jose Luis Rodriguez Zapatero are concerned that announcing bond investors will have to shoulder a greater part of any future bailout will spook traders at a time when Ireland and Portugal are struggling to cut their budget deficits.

European Central Bank President Jean-Claude Trichet told EU leaders last week he’s concerned that talk of a debt restructuring mechanism from 2013 would hurt the bonds of the euro-region’s so-called periphery nations, according to an EU official familiar with the talks.

Irish bonds fell for a sixth day, sending the 10-year yield to a record, and Greek bonds dropped for a seventh day, the longest losing streak since April.

Debt market ‘challenges’

“Germany’s plans for burden-sharing in the event of a euro-zone default and the re-statement of the no-bailout law present challenges to the debt market,” Steve Barrow, head of research for Group-of-10 currencies at Standard Bank, said today in a note.

“We suspect that 10-year Greek spread over Germany will scale 1,000 basis points and Ireland 500 basis points, probably before the end of the year.”

The Greek-German yield spread widened 19 basis points to 841 basis points at 10:29am in London. The yield on Irish 10- year bonds against German bunds, the euro region’s benchmark, gained 12 basis points to 474 basis points, the most since Bloomberg began collecting the data in 1991.

EU leaders agreed last week to establish a permanent debt mechanism to help stem any recurrence of the European debt crisis that forced a €110bn bailout for Greece and establishment of a temporary €750bn fund to backstop the euro.

‘Differing approaches’

Merkel said on October 29 that she and Trichet had “differing approaches” on the risk the rescue mechanism for indebted euro- area countries means for those government’s bonds.

ECB Executive Board member Lorenzo Bini Smaghi said in a speech yesterday that he opposes setting precise rules for debt restructuring.

“It is suggested by some that precise rules and conditions for debt restructuring should be attached to the creation of the new European mechanism, with a view to achieve an orderly restructuring,” Bini Smaghi said.

“In my view, this is unnecessary, undesirable and unlikely, to quote a recent staff paper by the International Monetary Fund.”

In her Bruges speech, Merkel said that steps to prevent EU members running up excessive debt include sanctions that are brought in quicker and earlier, as well as closer EU-wide co- ordination on economic policy.

The debt mechanism intended to replace the euro fund when it expires in three years “needs a clear legal basis” in EU treaties, Merkel said.

EU leaders agreed on “limited” changes to the treaties to secure stability in the euro area. ‘I’m very happy about that,” she said.


Also in Business