Germany stiffened its opposition to expanding government-financed aid for debt-plagued euro nations, leaving the European Central Bank to shoulder the bulk of the burden of fighting the crisis.
With Chancellor Angela Merkel ruling out an increase in the euro area’s 750 billion-euro ($1 trillion) emergency fund, Germany yesterday put the spotlight on the European Central Bank (ECB) by endorsing a possible boost in its capital.
Discord between Merkel and ECB President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker on the eve of a European Union summit evokes the tensions during the first phase of the debt crisis, when Germany held out for more than two months before consenting to a loan package for Greece.
“The consequence is a stalemate that leaves us with a familiar sense of déjà vu,” Ken Wattret, chief euro-area economist at BNP Paribas in London, said in a note to investors. “Market tensions are likely to resurface, as governments remain very publicly divided on the appropriate way forward.”
The review is “not good for spreads or the euro,” Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank in London wrote in an e-mailed note.
Spreading contagion
Evidence that core countries in Europe are also at risk mounted yesterday when Standard & Poor’s cut the debt outlook for Belgium, which is stuck with a caretaker government six months after inconclusive elections. Belgian bonds fell, pushing the risk premium against comparable German notes up 2 basis points to 102 basis points.
“The main risk to economic recovery and the main risk to market performance in 2011 is the euro zone,” Andrew Popper, chief investment officer at SG Hambros Bank, said on Bloomberg Television’s On The Move with Francine Lacqua. “The euro zone will be the dominant problem.”
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Merkel will lay out Germany’s position in an 11 am speech to parliament in Berlin today. EU leaders start a two-day summit at 5 pm in Brussels tomorrow with the focus on the permanent crisis-fighting system to be launched in 2013.
Proposals facing German resistance include using EU money to buy distressed governments’ bonds directly or in the secondary market, boosting the fund’s size or redrafting guarantee rules to make more of the money available.
Fund’s AAA rating
The need for a cash buffer to maintain an AAA credit rating puts the bailout fund’s effective lending capacity as low as euro 230 billion. Abandoning the top rating isn’t up for discussion, an EU official said yesterday.
Leaders of the 16 euro governments continue to be prodded by Trichet and the International Monetary Fund, contributor of euro 250 billion to the European rescue packages.
Trichet said euro-area governments need to put more money on the table to halt the crisis instead of depending on the central bank to soothe markets by buying the bonds of distressed governments.
“We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters in Frankfurt in remarks released yesterday.