European leaders enter year two of their fight to contain the euro region’s debt woes still struggling to put out the fire.
After committing almost $1 trillion, bailing out Greece and Ireland and asserting their determination to save the euro over the past 11 months, policy makers are returning to the drawing board after those previous efforts failed to pacify investors.
Their latest plan, elements of which will be debated when finance ministers meet next week, may extend help to Portugal, increase the size of their aid reserves, lower interest rates on bailout loans, and authorise purchases of outstanding bonds.
That still may not be enough, said Barton Biggs, managing partner of New York-based hedge fund Traxis Partners, who is “short” European securities, betting on their decline. He said officials should issue joint euro-region bonds, a measure opposed by Germany.
“The European Union (EU) and the European Central Bank (ECB) and the governments are being foolish,” Biggs told Bloomberg Television’s Deirdre Bolton on January 11. “The first rule of central banking and crisis management is do what you’ve got to do and do it big enough. You’ve got to risk overkill rather than not do enough.”
Investor demand rose in Spain’s first bond sale of the year today. The ¤3 billion of five-year notes were sold at an average yield of 4.542 per cent, less than the 4.63 per cent yield on similar-maturity bonds before the auction. Investors bid for 2.1 times the securities on offer, up from 1.6 in a November 4 sale.
Italy sale
Italy sold ¤3 billion of five-year bonds at the highest yield in two years. Portugal yesterday won some respite as borrowing costs fell at an auction of 10-year bonds.
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Speculation European officials are stepping up efforts to end the debt crisis propelled stocks higher with the MSCI World Index advancing to its highest level in more than two years. The gauge rose for a third day today, climbing 0.3 per cent to 1301.83 at 12.30 pm in Brussels.
The euro strengthened for a fourth day, adding 0.1 per cent to $1.3143. Underscoring the move toward what EU Economic and Monetary Affairs Commissioner Olli Rehn called a “comprehensive” package, German Chancellor Angela Merkel yesterday indicated a desire to do “whatever is needed to support the euro”.
Europe’s battle began last February when governments pledged “determined and coordinated action” to support Greece’s efforts to regain control of its finances. A month later it brought in the International Monetary Fund to assist and activated aid for Greece in early May, the same month it crafted a rescue facility for the continent and the European Central Bank began buying bonds. Banks were subjected to stress tests in July and by November a lifeline was extended to Ireland.
Efforts last year stumbled on Merkel’s demands for Greek budget cuts in rescue negotiations. Italian Finance Minister Giulio Tremonti said Germany can’t afford to do nothing while its “neighbour’s house” burns.
Policy makers may still not be acting “quickly enough in order to avoid further market disruptions,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co in Newport Beach, California, told “Bloomberg Surveillance” with Tom Keene yesterday.