Thursday 26 April 2018

Merkel in push on bond reform

Phillip Inman

Angela Merkel is expected to intensify her lobbying this week for reforms tying EU debt-holders to sovereign bailouts, despite concerns that she is unnerving investors and undermining the stability of the eurozone.

The German chancellor said last week she wanted bondholders to take a hit on the value of their holdings when a country is in trouble, potentially saving taxpayers billions of euros.

With calls for a bailout of Portugal intensifying, and worries about Spain, Italy and Belgium growing, Ms Merkel is keen to show her domestic audience that once the febrile mood is calmed, there will be an orderly mechanism for dealing with a repeat situation.

According to some reports, a blueprint for tackling eurozone debt crises could be ready in the next few days, with interim regulations in place as early as next year before full implementation in 2013.

Ms Merkel has already met French President Nicolas Sarkozy to establish the ground rules for a package of reforms.

It is understood the two governments have agreed that the best way to involve private investors in any future debt reorganisation would be to include collective-action clauses in bond sales. Such a clause would make it easier for countries to negotiate longer loan times or the partial payback of loans.

French finance minister Christine Lagarde emphasised that such a plan should treat private sector creditors on an individual basis. "The private sector should be involved in the consequences of an aid programme only on a case-by-case basis," she told a parliamentary committee.

Ireland's economy, for instance, has already shrunk by around 15 per cent and could drop by up to 25 per cent before it begins to recover. Under the new plan the country could negotiate a similar cut in the value of its loans, reducing its deficit burden and monthly interest bill.

Some economists have defended the German chancellor's stance. Harvard University professor Kenneth Rogoff said she was "basically on the right side of the debate".

However, any move to bring the regulations forward from 2013 is likely to meet stiff opposition from investors, not least German banks and pension savers, both of which own hundreds of billions of euros worth of European government bonds.

More importantly, regulators can be expected to warn that the current crisis is far from over and new regulations must wait or risk making the situation worse.

© Observer

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