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Germany’s Merkel Again Rules Out Rapid Action on Euro

November 25, 2011 by Leave a Comment

“Nothing has changed in my position,” she said at a news conference with Prime Minister Mario Monti of Italy and the French president, Nicolas Sarkozy, in Strasbourg, in eastern France.

But with signs of spreading contagion — a weak bond sale on Wednesday in Germany that lifted rates there, rates on sovereign debt rising to unsustainable levels in Italy and Spain, and interbank lending in Europe beginning to dry up — questions remained about just how long Germany can resist the persistent calls for action.

The German newspaper Bild reported Thursday that the Merkel government was inching toward accepting so-called euro bonds, at least in some form, even if the public stance remained against them, and that some of her party said there could be a trade-off for treaty changes. “We aren’t saying never,” Norbert Barthle, a legislator from her coalition, told journalists. “We’re just saying no euro bonds under the current conditions.”

That could be some time. France and Germany say euro bonds will make sense only down the road, when there is more convergence and growth, and when Paris and Berlin will not be on the hook for all the other weaker economies. France, however, wants to use the European Central Bank more aggressively to backstop vulnerable euro zone economies while they reform themselves.

Mrs. Merkel and other German officials fear that giving in to the calls for collective bonds or using the European Central Bank as a lender of last resort will ease pressure on the debtor nations, allowing them to avert the drastic structural changes that Berlin says that they need to make to become competitive, while making Germany and other creditors liable for their debts.

There was no hint of any softening from Mrs. Merkel after the leaders of the three largest economies in the euro zone met Thursday to try to reassure the markets about the future of the currency, vowing to work together on German-inspired treaty changes to promote more economic discipline and convergence.

Those treaty changes, which could take years to draft, ratify and put in effect, will have little impact on the current market anxiety over the euro, which has seen the interest rates on Italian, Spanish and French bonds rise sharply over German ones, and a growing distaste among investors even for the previously rock-solid German bonds.

The three leaders finished their luncheon meeting in Strasbourg by expressing confidence that the independent central bank would do the right thing for the currency, presumably continuing to buy enough bonds to keep the interest rates on European sovereign debt from becoming unsustainable.

“We all stated our confidence in the European Central Bank and its leaders, and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it,” Mr. Sarkozy told the news conference.

But Mr. Sarkozy’s frustration with German intransigence was evident. “I am trying,” Mr. Sarkozy said, “to understand Germany’s red lines.”

Mr. Sarkozy, who has been pressuring Berlin to let the bank act more decisively to support Italy and Spain and halt a rush out of euro zone bonds and banks, said that joint proposals to modify European Union treaties would be presented ahead of a summit meeting on Dec. 9. The modifications, sought by Germany but supported by France, would allow the European Union greater oversight of national budgets and statistics, create debt limits for governments and try to create more convergence on policies like pension ages and tax levels.

But Mrs. Merkel made it clear that any new treaty changes would not touch the charter of the central bank.

The markets were predictably disappointed with the German position. The yield on Italian 10-year bonds, the broad cost of government borrowing, crept back above 7 percent on Thursday as European stocks fell for a sixth day. The markets were also affected by remarks from the chief economist of the Organization for Economic Cooperation and Development, Pier Carlo Padoan, who warned in an interview with the newspaper La Stampa that while a euro-zone recession could still be avoided, forthcoming forecasts showed “declining and very weak growth.”

Steven Erlanger reported from Paris, and Nicholas Kulish from Berlin.

Article source: http://www.nytimes.com/2011/11/25/world/europe/merkel-rejects-rapid-action-on-the-euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Merkel Rejects Rapid Action on the Euro

November 24, 2011 by Leave a Comment

“Nothing has changed in my position,” she said at a news conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, in eastern France.

But with signs of spreading contagion — a weak bond sale Wednesday in Germany that lifted rates there, rates on sovereign debt rising to unsustainable levels in Italy and Spain and interbank lending in Europe beginning to dry up — questions remained about just how long Germany can resist the persistent calls for action.

The German newspaper Bild reported Thursday that the Merkel government was inching towards accepting so-called eurobonds, at least in some form, even if the public stance remained against them, and that some of her party said they could be a tradeoff for treaty changes. “We aren’t saying never,” Norbert Barthle, a legislator from her coalition told journalists. “We’re just saying no eurobonds under the current conditions.”

That could be some time. France and Germany say eurobonds would make sense only down the road, when there is more convergence and growth, and Paris and Berlin will not be on the hook for all the other weaker economies. France, however, wants to use the European Central Bank more aggressively to backstop vulnerable euro zone economies while they reform themselves.

Mrs. Merkel and other German officials fear that giving in to the calls for collective bonds or to use the European Central Bank as a lender of last resort will ease pressure on the debtor nations, allowing them to avert the drastic structural changes that Berlin says they need to make to become competitive, while making Germany and other creditors liable for their debts.

There was no hint of any softening from Mrs. Merkel after the leaders of the three largest economies in the euro zone met Thursday to try to reassure the markets about the future of the currency, vowing to work together on German-inspired treaty changes to promote more economic discipline and convergence.

Those treaty changes, which could take years to draft, ratify and implement, will have little impact on the current market anxiety over the euro, which has seen the interest rates on Italian, Spanish and French bonds rise sharply over German ones, and a growing distaste among investors even for the previously rock solid German bonds.

The three leaders finished their luncheon meeting in Strasbourg by expressing confidence that the independent central bank would do the right thing for the currency, presumably continuing to buy enough bonds to keep the interest rates on European sovereign debt from becoming unsustainable.

“We all stated our confidence in the European Central Bank and its leaders, and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it,” Mr. Sarkozy told the news conference.

But Mr. Sarkozy’s frustration with German intransigence was evident. “I am trying,” Mr. Sarkozy said, “to understand Germany’s red lines.”

Mr. Sarkozy, who has been pressuring Berlin to let the bank act more decisively to support Italy and Spain and halt a rush out of euro zone bonds and banks, said that joint proposals to modify European Union treaties would be presented ahead of a summit on Dec. 9. The modifications, sought by Germany but supported by France, would allow more Brussels greater oversight of national budgets and statistics, create debt limits for governments and attempt to create more convergence over matters like pension ages and tax levels.

But Mrs. Merkel made it clear that any new treaty changes would not touch the charter of the central bank.

The markets were predictably disappointed with the German position. The yield on Italian 10-year bonds, the broad cost of government borrowing, crept back above 7 percent on Thursday as European stocks fell for a sixth day. The markets were also affected by remarks from the chief economist of the Organization for Economic Cooperation and Development, Pier Carlo Padoan, who warned in an interview with La Stampa newspaper that while a euro zone recession could still be avoided, forthcoming forecasts showed “declining and very weak growth.”

Steven Erlanger reported from Paris and Nicholas Kulish from Berlin.

Article source: http://www.nytimes.com/2011/11/25/world/europe/merkel-rejects-rapid-action-on-the-euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

News Analysis: Greece’s Urgency Challenges European Union Efforts

October 3, 2011 by Leave a Comment

The 17 European Union nations that share the euro don’t have that much time, of course, to convince investors that they have a plan to hold the currency together and prevent a run on the Continent’s banks. Some analysts say they have less than five weeks, until the Group of 20 summit meeting in November; others say a bit longer.

But rapid action comes hard to a union that works in increments, with political agreement required at every step.

In the short term, Greece remains the central problem. Two bailouts have not been enough. Greek public debt continues to mount, and so does the pressure on the government to find more revenue and make more cuts. Europe’s strategy, to the extent it can be discerned, is to put off restructuring Greece’s debt as long as possible and build up enough backing for a bailout fund so that banks with large exposure to the sovereign debt of Greece and other troubled euro-zone countries, like Portugal, Ireland, Italy and Spain, can survive an all-but-inevitable Greek default.

But the austerity-driven recession in Greece has made its budget deficit even worse than experts predicted, and the country has not kept all its promises to the “troika” — the European Union, the International Monetary Fund and the European Central Bank — that is keeping Athens afloat. Experts from the troika left Greece a month ago in unofficial disgust; they returned last week only after getting fresh promises of action.

Athens is again at the brink. Without the next tranche of aid from the troika — 8 billion euros — Greece could immediately default. So the troika is playing hardball, trying to force Athens to make crucial structural changes that lenders think will never happen otherwise.

Still, the consequences of a disorderly default are considered so dire that Athens has cards to play, too. A strike by workers at the national statistics bureau has made it difficult to get up-to-date fiscal data. The government has said it faces default by mid-October without the aid, but “we think they were exaggerating deliberately to put pressure on us,” a senior European official said.

When speaking privately, officials concede that Greece’s debt, trading at only about 40 percent of its face value, is unsustainable and that lenders will probably have to write some of it off. A “haircut” of 50 percent, followed by a recapitalization of banks if necessary, is the outcome most commonly mentioned.

Germany and France are not prepared to consider doing that yet, though, in part because relieving the pressure on Greece would remove its incentive to overhaul its finances and make its economy more competitive. And if Greece gets such a deal, why shouldn’t Portugal, Ireland and the others?

Equally important, Germany and France want to delay any Greek default, orderly or not, until they have bolstered the rescue fund and taken other steps to protect Italy, the biggest economy in southern Europe.

So for now, the European Union is focused on its own struggle to ratify the bailout deal struck on July 21. It would expand the effective lending capacity of the rescue fund to 440 billion euros ($589 billion) and give the fund new powers to buy bonds on secondary markets, lend to nations and recapitalize banks.

The deal still needs ratification by Malta, the Netherlands and Slovakia. Despite doubts about even more loans to Greece, they are likely to go along, while Finland, another skeptic, still wants Greek collateral. In the meantime, the European Central Bank is buying large amounts of Spanish and Italian paper to try to keep those countries’ borrowing costs down.

In the medium term comes another challenge. There is consensus that while 440 billion euros can cover Greece, Portugal and Ireland, it will not be enough if Italy, Spain and the banks are in play. So the next debate is over how to enlarge or leverage the fund. At least five new models are under consideration, European officials say.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2011/10/03/world/europe/greeces-urgency-challenges-european-union-efforts.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,