March 29, 2024

Members of Merkel’s Party Emphasize Opposition to Euro Bonds

FRANKFURT — Chancellor Angela Merkel of Germany has faced harsh criticism for being too passive in the face of Europe’s debt crisis. But on Monday, members of her own party and the Bundesbank made it clear just how hard it would be for her to pursue any solution that asked German taxpayers to sacrifice for the sake of European unity.

With many economists calling for Europe to expand the euro zone’s bailout fund or start issuing bonds guaranteed by all 17 of the countries that share governance of the common currency, German politicians at home struck back.

“Euro bonds would push up German interest rates,” Philipp Missfelder, the foreign affairs spokesman for Mrs. Merkel’s Christian Democratic Union, said Monday after a meeting of the center-right party’s board. “The cost of servicing the debt would be enormous.”

Meanwhile, the Bundesbank, representing the views of Germany’s monetary authorities within the European Central Bank, complained Monday that liabilities acquired by weaker countries were being offloaded onto the stronger ones.

“A major step is being taken toward common assumption of risks from weak national finances and economic missteps,” the Bundesbank said in its monthly bulletin. “This weakens the foundation of fiscal responsibility and self-discipline.”

The president of the Bundesbank, Jens Weidmann, is Mrs. Merkel’s former economic adviser.

Germany is the euro area’s largest and richest country, and no solution to the Continent’s debt crisis can succeed without German political support and German money.

Germany “would have enormous power if it took the initiative,” said Daniel Gros, director of the Center for European Policy Studies in Brussels.

“Now would be a time when they could do something,” he said of Mrs. Merkel and other German leaders. But “I’m not holding my breath.”

Many analysts complain that while Mrs. Merkel and other leaders, like Wolfgang Schäuble, the German finance minister, have made broad statements about cutting debt and promoting closer economic cooperation in Europe, they have offered few specifics and no timetable.

During a morning-long meeting of the party’s board in Berlin, the first since the summer recess, Mrs. Merkel told party leaders that she would not support the issuance of common European securities. Mrs. Merkel was repeating the position she voiced Sunday in an interview with ZDF television.

Advocates say euro bonds would allow members of the euro zone to pool their financial strength and hold down borrowing costs for weaker countries like Greece or Spain.

But even the most outspoken advocates acknowledge that even if German leaders agreed, it would still be unlikely that euro bonds could be issued soon enough to help much in the current crisis. Common debt would have to be accompanied by tougher rules on fiscal prudence, which would take months if not years to negotiate.

“I believe that is where we are headed, but it is not going to happen overnight,” said Laurent Bilke, head of European interest rate strategy at Nomura in London. “That is why the market is in a bad mood. There is no obvious quick fix that you can think of.”

Leading stock indexes in Europe and the United States rose Monday after brutal losses last week that were caused in part by investors’ doubts that European leaders were capable of developing an adequate solution to the debt crisis. That is a reason few analysts expect that the stock market turmoil is over.

In the absence of a more potent political solution, the European Central Bank has steadily increased the scope of its activities, most recently intervening in bond markets to prevent borrowing costs for Spain and Italy from reaching dangerous levels.

The central bank disclosed Monday that it spent 14.3 billion euros ($20.5 billion) buying government bonds on open markets last week, down from 22 billion euros the week before. The central bank does not disclose which bonds it purchases, but Mr. Bilke said the bank appeared to be buying 10-year Italian and Spanish bonds with the aim of holding their borrowing costs below 5 percent. If yields rise back to 6 percent or more for any extended period of time, it would most likely prove too expensive for the countries to bear.

Article source: http://feeds.nytimes.com/click.phdo?i=9daec2ab6a8b1f6ea9730809895c48ce

Talk of Greek Debt Restructuring Just Won’t Die

The Greeks reject a debt restructuring out of hand. The European Central Bank fears that such a move will spread financial panic. And, meanwhile, the European Union and the International Monetary Fund insist that their recipe of bailouts combined with sharp spending cuts make restructurings unnecessary.

Nevertheless, the notion keeps popping up that Greece, and perhaps even other weak European Union countries like Ireland and Portugal, will be forced to restructure.

Almost a year after it was saved from default by a bailout of 110 billion euros, or about $157 billion, from its European partners and the I.M.F., the Greek economy continues to sag under 340 billion euros in debt. Greece’s budget deficit is expected to be 8.4 percent of gross domestic product this year, compared with a mandated target of 7.5 percent.

The bond markets have taken note as economists, as well as German politicians, have emphasized a restructuring solution that will require bond investors and banks to take a loss on their debt holdings. On Monday, the yield on 10-year Greek bonds hit a high of 14.3 percent. Yields on Spanish and Portuguese debt also shot up as electoral gains made by an anti-euro party in Finland fed concern that a possible 80 billion-euro plan to rescue Portugal — which requires unanimous assent by European Union countries — might be jeopardized.

All of which reflects an emerging view, although it has not yet been officially stated, that it makes little economic sense for the monetary fund and the European Union to keep lending money to Greece so that the government can pay back private investors at double-digit interest rates — especially as Greek citizens suffer the effects of a severe austerity program.

“Behind the curtains, they are looking for a smooth restructuring,” said Theodore Pelagidis, an economist in Athens and the author of recent book on the Greek economy’s collapse. “The basic reality is that we cannot service our debt, and if Greece does not see a radical solution, it will consume itself.”

Proponents of restructuring say banks have had more than a year to prepare by either selling positions at a loss or raising capital. The markets, proponents argue, have already factored in a restructuring, so why wait until 2013 for investors to take their first losses, as proposed by European leaders in the structure of the future bailout funds?

Until recently, France and Germany — and especially the European Central Bank — have been adamantly opposed to any restructuring that would require investors to take “a haircut,” or reduced returns, because of the effect this might have on French, German and Greek banks.

Lately, however, there have been signs that once-closed minds are opening up to alternative solutions.

The German finance minister, Wolfgang Schäuble, raised the possibility of a Greek restructuring last week in comments to a German newspaper. He also alluded to an coming European Union study on the sustainability of Greek debt that would guide Europe’s conduct on the issue.

It is not clear what the conclusion of the report, expected to be published in June, will be. One option that has attracted some attention, though, is a plan that would ask bondholders to trade in their current paper for debt with lower rates and longer maturities.

Such a proposal, which was successfully used by Uruguay in 2003, would, in theory, minimize banking losses and extend debt payments further into the future, easing Greece’s financing burden in the near term.

“It’s being talked about more, and the official sector should want to do this,” said Lee C. Buchheit, a lawyer for Cleary Gottlieb Steen Hamilton, who has worked on debt restructuring deals dating back to the 1980s. In Greece’s case, however, “the worry is that it may not go far enough. This is a country where debt is 150 percent of G.D.P.”

Mr. Buchheit, who recently co-wrote a paper on possible variations for Greece’s debt crisis, says an approach like this would be similar to a solution reached on Latin American debt in the 1980s in that it would give creditors and debtors more time to prepare themselves for an eventual restructuring.

But before banks accepted such a deal, they would require extra cash, which in today’s political environment might be difficult to come by.

They will also need to be persuaded to, in effect, increase their exposure to Greece at a time when the country’s efforts at reviving its economy seem to be stumbling amid continued difficulties in raising the revenue it needs to reduce its deficit.

As the country where the debt crisis began, Greece remains the focal point of investors’ concerns. The tax increases and spending cuts being imposed by the Greek government as part of its rescue package have deepened an already pervasive gloom in Athens. Some economists now forecast that Greek growth will plunge 2 to 3 percent in 2012 after an expected 4 percent retraction this year.

Such a double dip would likely drive unemployment, already around 14 percent, to Spanish levels of around 20 percent and further complicate the Greek government’s task of persuading its citizens to sacrifice more.

With 25 billion euros that Greece must raise from the public markets in 2012, the pressure is building on Athens to find a solution that somehow shares the pain more equally.

“Greece is a symbol of the crisis,” said Mr. Pelagidis, the economist. “We don’t need another bailout — we need creditors to take a hit.”

Article source: http://www.nytimes.com/2011/04/19/business/global/19euro.html?partner=rss&emc=rss