March 1, 2021

Europe’s Bailout Squabbles Add to Market Uncertainty

By insisting that it receive collateral from Greece in return for aid, Finland is threatening to upend an agreement that euro zone countries made in July to expand the European Union bailout fund.

That agreement is crucial to restoring confidence among bondholders that Europe can find a lasting solution to its sovereign debt troubles. But the continued squabbling in Europe has alarmed policy makers around the world, and the dispute over collateral provides one more measure of market uncertainty this week as the summer lull ends and trading regains a more normal volume.

Spain and Italy, whose beleaguered economies are receiving support from the European Central Bank, are scheduled to conduct debt auctions this week.

The possibility that euro zone members will not agree on an expansion of the bailout fund is a concern for the Federal Reserve Bank of New York, according to a person briefed on issues there. Matthew Ward, a spokesman for the New York Fed, declined to comment.

Christine Lagarde, president of the International Monetary Fund, warned European leaders on Saturday that their fractiousness was threatening the common currency.

“The current economic turmoil has exposed some serious flaws in the architecture of the euro zone, flaws that threaten the sustainability of the entire project,” Ms. Lagarde, the former finance minister of France, said in Jackson Hole, Wyo., where makers of economic policy were meeting.

Finland would contribute less than 2 percent of the guarantees provided to the fund, known as the European Financial Stability Facility. But the country’s demands, the subject of intense negotiations in recent days, threaten to derail the fragile consensus that is preventing Greece from defaulting on its debt.

Finland is the most vivid example of the way parochial domestic politics can become Continental problems, threatening the unity of the 17 euro zone members as they face their deepest crisis ever. But Germany, the Netherlands and Austria — all wealthy countries with strong economies — also harbor deep opposition to bailing out Greece, Portugal, Ireland or any other country that may become overwhelmed by debt.

Finland is just one of 17 countries whose parliamentary approval is needed for the expanded bailout fund and whose domestic politics could upset the process. And Finland points to a bigger governance problem in Europe, said James D. Savage, a professor at the University of Virginia who has published a book on European monetary union.

“You have all these multiple veto points, so they can’t come to a reasonable conclusion, at least not easily,” Mr. Savage said. “You have increasingly less efficient decisions that are being made.”

Even if European leaders solve the Finnish problem, analysts in the United States say traders have accepted that Europe may face similar squabbles in the future.

“This specific issue is just part of a broader mural that Europe will be wrestling with for years to come,” said Ward McCarthy, the chief financial economist at Jefferies Company, an asset management and investment banking firm based in New York. “The general perception is that European financial issues are not going to be resolved soon and they will provide periodic disruptions to global financial markets for years.”

Officials from European finance ministries spent much of Friday in long-distance negotiations about the collateral issue but did not reach an agreement. Conflicting reports about the negotiations have fed market confusion. The news media in Germany and other countries reported on Friday that Finland had dropped its demands, but the reports were swiftly denied by Finnish officials.

The climate created by the collateral dispute could make it more difficult for the European Central Bank to continue to defend Italy and Spain in bond markets and contain their borrowing costs. This month the bank has spent 36 billion euros ($52 billion) intervening in debt markets in an effort, so far successful, to cap bond yields for the two countries.

Jack Ewing reported from Frankfurt and Louise Story from New York.

Article source:

Speak Your Mind