European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit to hammer out a lending mechanism for deficit-stricken nations.
Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed on the backstop yesterday and told ministers to get it ready before Asian markets open.
“We are going to defend the euro,” Spanish Economy Minister Elena Salgado told reporters as she arrived to chair today’s Brussels meeting. “We think we have a duty for more stability for our currency. We will do whatever is necessary.”
Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 per cent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc’s collapse. It prompted the US and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession.
President Barack Obama spoke by phone with German Chancellor Angela Merkel for the second time in three days, adding to the international pressure Europe has faced since a hurriedly arranged conference call of Group of Seven finance chiefs on May 7.
Obama today emphasized “the importance of the members of the European Union taking resolute steps to build confidence in the markets,” White House spokesman Bill Burton told reporters in Hampton, Virginia.
‘Wolfpack Behavior’
“In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.”
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European officials declined to disclose the size of the stabilisation fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments. The meeting started just after 3 pm and a press conference was scheduled for 6 pm Some officials said talks could last longer.
“There is some discussion about what the solution will be,” Dutch Finance Minister Jan Kees de Jager said. “There are several alternatives at the moment.”
Separately, European Central Bank council members were slated to hold a teleconference today.
‘Market Vigilantes’
“Europe is getting its act together,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.”
Government officials said they won’t push the independent ECB to, for example, buy government bonds. President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. Trichet is in Basel, Switzerland, today for a scheduled meeting of central bankers from the Group of 10 nations. Vice President Lucas Papademos is attending the Brussels talks.
With the euro facing the stiffest test since its debut in 1999, the weekend turned into a crisis-management exercise to restore faith in the currency and prevent a European debt crisis from cascading around the world.
The purpose is to “decide on a mechanism that enables us to assure the stability of the euro, stability in the zone and, beyond that, stability in financial markets,” French Finance Minister Christine Lagarde said.
Euro-Era Highs
The euro slid to $1.2715 from $1.3293 in the past week, and is down 15 per cent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 per cent to 237.18.
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.
Britain, the EU’s third-largest economy, won’t contribute to a fund to shore up euro countries, though it backs efforts to restore stability, Chancellor of the Exchequer Alistair Darling said.
“When it comes to supporting the euro, that is for the eurogroup countries,” Darling told Sky News. “We need to show again today that by acting together we can stabilise the situation.”
German Calls
At the leaders’ summit in Brussels, Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s.
Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said.
The vow to push budget shortfalls below the euro’s 3 per cent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 per cent of gross domestic product in 2010 and 6.1 per cent in 2011.
Plans for a European credit-rating authority are already under consideration at the European Commission, the bloc’s Brussels-based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.
Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, European Commission President Jose Barroso said “some of the points you have mentioned will be contemplated.”
The political leadership of the $12 trillion economy yesterday also signed off on a ¤110 billion ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens.