Tensions rise ahead of crucial summit on crisis
POLITICAL tensions rose in Europe ahead of tomorrow's summit as German Chancellor Angela Merkel tried to bury once and for all the idea of common eurozone bonds by saying Europe would not share total debt liability "as long as I live".
The chancellor's comments came after the eurozone's leading finance ministers met yesterday evening at a hastily convened meeting which aimed to narrow differences on how to solve a worsening debt crisis.
Ms Merkel stamped on the idea of mutualising debt -- favoured by France, Italy and Spain -- at a meeting of deputies from her Free Democratic coalition partners in Berlin, according to people who attended the closed-door session.
"I don't see total debt liability as long as I live," she was quoted as saying yesterday, a day after branding the idea of eurobonds "economically wrong and counterproductive".
However in a move that will be welcomed by Taoiseach Enda Kenny, Germany appears ready to budge on using the eurozone's rescue funds more flexibly to help banks and reassure investors spooked by an increased risk of facing write-downs on government bonds.
The parties in Ms Merkel's centre-right coalition have proposed allowing the proposed European Stability Mechanism (ESM), to funnel aid directly to national bank rescue funds, according to a draft seen by Reuters.
That could spare governments like Spain's some of the political stigma of a bailout, although the loans would still be on the state's balance sheet, increasing its debt, and would still be subject to strict conditions. It could also be used by Ireland if the Government here needs a second bailout or seeks to renegotiate the existing bailout.
Significantly, Germany's conservative party leader Volker Kauder told another meeting of lawmakers that eurozone governments were discussing making it possible to remove preferred creditor status from the ESM rescue fund.
Neither Ms Merkel nor Finance Minister Wolfgang Schaeuble, who insisted on that treaty clause to make private bondholders take first losses in any future debt restructuring by bailed-out states, spoke out in favour of such a move, the sources said.
The provision has scared investors off buying Spanish debt since Madrid was promised a bailout of up to €100bn for its debt-stricken banks, since they fear a "haircut", driving bond yields up to alarm levels.
Italian Prime Minister Mario Monti told parliament he would not just rubber stamp conclusions of the EU summit tomorrow and Friday and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.