Merkel Digs In on Bailout Terms as Discord Mars EU Crisis Talks
March 03, 2011, 3:59 AM EST
By Tony Czuczka
March 3 (Bloomberg) -- German Chancellor Angela Merkel is digging in against easing bailout conditions as haggling over a blueprint to end the euro debt crisis enters its home stretch.
With the European Union nearing its end-of-the-month deadline for a reinforced plan to aid debt-strapped countries, Merkel yesterday dismissed talk of a reduction in bailout-loan rates, a sign German officials are stepping back from a willingness to forge a grand bargain to protect the euro.
Hemmed in by state elections and EU resistance to her calls for economic-policy coordination, Merkel meets European allies in Helsinki tomorrow amid mounting speculation that Portugal will be the third country to seek a lifeline. Failing to forge a consensus on an anti-crisis plan threatens to roil the euro and extend declines in bonds of Spain, Italy and Ireland.
“People are increasingly braced for a disappointment,” Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London, said by phone. “We’re closer than we have been for a long time, but I don’t think the market is braced for peace between the core and periphery.”
Risk premiums for Spain, Portugal and Italy have increased since a Feb. 4 EU summit that failed to endorse an economic competiveness plan proposed by Merkel and French President Nicolas Sarkozy as a condition for aid. The euro, meantime, has climbed as euro-area inflation accelerated.
Underscoring the discord over the debt-fighting formula, officials at the meeting of European Conservative party leaders called by Finland include incoming Irish Prime Minister Enda Kenny, who wants to renegotiate the bailout, and Finnish Finance Minister Jyrki Katainen, who has signaled opposition to easing Ireland’s loan rate, which averages 5.8 percent.
Debt Limits
As investors speculate that Portugal is moving toward an aid request, Merkel is sticking to her crisis solution: all euro countries should strive to be as competitive as Germany and join it in setting constitutional debt limits.
EU leaders can’t “artificially reduce” the rates on aid loans, Merkel said yesterday at a joint briefing with Portuguese Prime Minister Jose Socrates. “If the Irish government now has a problem with interest rates, our job is to figure out what we can do -- or whether we can do anything.”
Gone from statements by German officials is the flexibility signaled Jan. 25 by Deputy Finance Minister Joerg Asmussen. He said then that there was a “certain margin” on rescue loans that could be considered in exchange for commitments by governments to rein in debts and deficits.
Finance Minister Wolfgang Schaeuble also defended charging market interest rates in exchange for bailouts.
‘Not Ready’
“We can’t back off from this conditionality,” he said Feb. 28. “That would be the end of the foundation we’ve built for the European currency. This is why the German government is not ready to make any compromises on this issue.”
Those public comments are reflected in closed-door negotiations in the run-up to EU summits on March 11 and March 24-25, according to two European officials involved in the talks. Germany, backed by Austria, Finland and the Netherlands, opposes cutting rates on emergency loans and using the European Financial Stability Facility, the main bailout fund, for debt buybacks, the officials say.
Nor is there consensus on boosting the firepower of the 440 billion-euro ($609 billion) EFSF, whose lending capacity is limited to about 250 billion euros to protect its AAA rating.
The officials say one possible tweak would allow the EFSF to make purchases in the primary markets, giving aid recipients access to markets.
It’s Not Over
“We just don’t believe the sovereign debt crisis is over,” Michala Marcussen, London-based chief economist at Societe Generale SA, said in an interview. “People underestimate German conditionality. It’s clear that European governments and especially the German leadership are not willing to have the taxpayer take up the whole rescue load.”
Frustration has boiled over publicly. “The discussions are taking longer than desirable and delays and hesitations affect the euro zone and the stabilization of the euro,” Portuguese Finance Minister Fernando Teixeira dos Santos said Feb. 15.
Portugal is already taking Merkel’s medicine, raising taxes, cutting spending by the most in three decades and taking steps to boost competitiveness. Even so, its borrowing cost has risen to levels faced by Ireland and Greece before they required bailouts, says Christopher Iggo, London-based chief investment officer for Axa Investment Managers.
“I fully expect Portugal to go within the next few weeks,” Iggo said. “It seems like only a matter of time before Portugal falls into the arms” of the rescue fund, David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a March 2 note.
German Demands
Presiding over the country that contributed the most to the Greek and Irish bailouts, Merkel has hammered home her demand that the euro area commit to cutting debt and deficits in return for her pledge to keep the 17-nation currency bloc together.
“All European countries, especially the members of the euro, have to accept the best of us as their model,” she said in Hanover, Germany, on Feb. 28. Settling for “the European average isn’t competitive on the global stage.”
Germany’s own deficit-cutting and the nation’s fastest economic growth in two decades are behind Merkel’s argument, even as her domestic constraints for mending the euro region’s cracks increase.
She lost her candidate to succeed Jean-Claude Trichet as the first German head of the European Central Bank when Axel Weber pulled out of the race Feb. 11. Lawmakers are warning her against risking more taxpayer money to help profligate euro nations and insisting they have a say on any deal. Her Free Democrat coalition partners have objected to any softening.
Merkel Setbacks
Merkel is on the defensive after her party lost Feb. 20 state elections in Hamburg, the first of seven in Germany this year, and Karl-Theodor zu Guttenberg, the country’s most popular politician, quit as defense minister on March 1 amid allegations he copied part of his doctoral thesis.
Baden-Wuerttemberg, a state run by Merkel’s Christian Democrats since 1953, goes to the polls two days after the second EU summit in the year’s key electoral test. Polls indicate the race between the state’s ruling coalition and the opposition Social Democrats and Greens is too close to call.
Losing the region, home to companies such as Daimler AG and SAP AG, would increase the majority of Merkel’s opponents in the German parliament’s upper house, or Bundesrat, where state governments are represented.
Merkel, whose favorite saying is “Calm is the source of strength,” isn’t showing signs of being rushed. Europe’s economy may be held back for years if she succeeds in imposing her conditions, Societe Generale’s Marcussen said.
“All of these things are going to be hard to achieve,” she said. “If they impose the German diet, Europe will look stronger in 10 to 20 years, but it will go through a nasty period first. I don’t see where you get a growth impetus from.”
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Un pò lunghetto, ma interessante. Fa il punto sull'attuale situazione.
