Merkel not for turning on move to eurobonds
Stocks slump and Italian, Spanish bond yields rise ahead of crucial EU summit in Brussels
ANGELA Merkel quashed hopes yesterday that Germany's resistance to eurobonds is weakening, even as a leaked analysis from her finance ministry suggested a break-up of the single currency would have a devastating effect on Germany's own economy.
The German chancellor has come under intense pressure ahead of a European summit this week to give the go-ahead to the mutual issuance of sovereign debt by the countries of the eurozone to calm financial markets and ease the unsustainable borrowing costs faced by Spain and Italy.
In a fresh reminder of the fragility of the currency bloc, Cyprus yesterday announced that it would become the fifth eurozone nation to seek outside assistance. Cyprus said it needed help because of negative spillover effects on its banks from the Greek financial sector.
But despite the mounting woes in the troubled union, Ms Merkel played down expectations of a major shift in policy from Germany at the summit, which begins in Brussels on Thursday, and reiterated her longstanding view that common eurozone bonds would be "economically wrong and counter-productive".
She said: "When I think of the summit I feel concerned that yet again we will have too much focus on all kinds of ways of sharing debt."
Financial markets were depressed by the news, which sent Italian and Spanish borrowing costs up.
"There is now a growing suspicion that Germany is simply not ready to accept the level of debt mutualisation necessary to restore confidence and keep the single currency project alive," said Nicholas Spiro of Spiro Sovereign Strategy.
Hopes that Berlin might be willing to make greater financial commitments to ensure the survival of the euro had been raised after an analysis by the German finance ministry was leaked to 'Der Spiegel'.
It showed that the economic impact of a break-up of the single currency would knock 10pc off the size of the German economy and push unemployment above five million.
The magazine quoted a finance ministry official saying: "When measured against such scenarios, even an extremely costly rescue seems to be the lesser evil."
The Swiss bank UBS said that Germany's losses could be €500bn, more than 40pc of its GDP.
Last week, the International Monetary Fund joined the European Commission, France and Italy in urging the eurozone to move towards mutual debt issuance.
The European Union's competition commissioner JoaquIn Almunia yesterday backed this up by describing eurobonds as indispensable.
He said: If we don't move forward with a gradual mutualisation of debt, there is no possibility of stopping the contagion.''
Other items on the summit agenda in Brussels will be a European Union banking union, designed to reassure depositors and prevent a disastrous run on banks in weaker eurozone nations.
This is expected to include proposals for a common supervisor of European banks, likely to be identified as the European Central Bank, and pan-European guarantees for ordinary depositors.
Private banks in Greece and Spain have witnessed large withdrawals by ordinary savers concerned that their money could be at risk of being devalued if their countries were to crash out of the single currency.