Sept. 16 (Bloomberg) -- European Central Bank President Jean-Claude Trichet pressed euro-area governments to take decisive action to halt the debt crisis, after the ECB bought them more time by extending an emergency lifeline to lenders.
Trichet said finance ministers meeting in Wroclaw, Poland today need to show the same “unity of purpose” as central banks did yesterday in providing extra dollars to European banks bruised by the crisis that has seeped from Europe’s edges to its core.
“We are not back to ‘business as usual’ as some thought some months ago,” Trichet said late yesterday in Wroclaw. “We call all authorities to implement swiftly all decisions and to be constantly ahead of the curve.”
Eighteen months of crisis-fighting and 256 billion euros ($355 billion) in aid for Greece, Ireland and Portugal have failed to stabilize markets. The turmoil has spread to Italy and Spain, sending tremors through Europe’s banking system and leading to speculation that a currency meant to be permanent might break up.
European finance ministers are also braced for a dressing- down from U.S. Treasury Secretary Timothy Geithner, attending his first euro-crisis meeting at the invitation of the host Polish government, a country still using its own currency.
The stewards of the 9.5 trillion-euro economy must “do more to earn the confidence of the world, that they have the political will to do this,” Geithner said on Sept. 14.
Euro-area ministers meet on their own at 7:30 a.m. today. A press conference is scheduled for 12 p.m. Meetings of all 27 European Union finance ministers and central bankers follow in the afternoon and tomorrow morning.
The debt overhang is taking its toll on the wider economy, the European Commission said yesterday. It cut its growth forecast to 0.2 percent for the third quarter and 0.1 percent in the fourth, down from projections of 0.4 percent for both periods.
The ECB was the focus of the crisis management yesterday, offering a series of three-month dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years.
The ECB’s move and a pledge by German Chancellor Angela Merkel and French President Nicolas Sarkozy to keep Greece in the euro and prevent a default gave a lift to markets. Global stocks and the euro rallied yesterday, and bonds of debt-laden countries outperformed German bonds, the benchmark for Europe.
Greece’s two-year bond yield fell 12.96 percentage points to 61.52 percent. Fresh from a conference call with Merkel and Sarkozy, Greek Prime Minister George Papandreou promised a “decisive battle” for budget cuts to persuade European governments and the International Monetary Fund to pay an 8 billion-euro loan installment later this month.
“Implement and you get the next payment,” IMF Managing Director Christine Lagarde said on CNBC yesterday. “Time is running short and the Greek authorities have to deliver.”
Central bankers pushed for speedy enactment of a July 21 decision by political leaders to enable a government-financed rescue fund to buy the bonds of troubled states, taking that task off the ECB’s hands.
Country-by-country approval of the fund’s enhanced powers inched forward yesterday, with Spain and Luxembourg voting in favor. So far, five of the euro area’s 17 governments have ratified the upgrade of the fund, known as the European Financial Stability Facility.
The key vote is on Sept. 29 in Germany, where Merkel is struggling to muffle dissident voices inside her coalition that have raised the prospect that Greece will go bankrupt and, ultimately, leave the currency union.
Merkel allies ganged up on Economy Minister Philipp Roesler, head of the Free Democrats, the junior coalition partner, who had promoted default as a possible way of trimming Greece’s debt of close to 160 percent of gross domestic product.
Roesler should “perhaps be a bit more careful” and avoid “reckless” chatter that unsettles markets, Michael Meister, parliamentary finance spokesman for Merkel’s Christian Democratic Union, told reporters in Berlin yesterday.
The ECB has bought 143 billion euros of bonds, starting with Greece, Portugal and Ireland last year and widening the support operation to Italy and Spain in August. The commitment to propping up wobbly bond markets is a stopgap, designed to end as soon as the rescue fund can take over, council member Ewald Nowotny said.
The ECB would have to “rethink everything” if the EFSF isn’t strengthened in time, Nowotny told Austrian state radio ORF. “This is a very sensitive situation.”
European officials are close to an agreement on how the upgraded fund will use its new powers, which include bond purchases in the primary and secondary markets, precautionary credit lines and a bank-recapitalization facility.
Pre-emptive credit lines may go as high as 10 percent of GDP, or 160 billion euros in the case of Italy. Such sums would potentially exhaust the fund’s 440 billion-euro war chest and force European leaders to put in more.
Separately, negotiators for governments and the European Parliament cleared the way for a toughening of deficit and debt rules with more automatic sanctions for violators, plastering over a crack in the euro’s foundations.
The penalties are the central pillar of a six-part legislative package that includes closer monitoring of national competitiveness. The EU parliament and national governments still need to ratify the accord.
“Europe is built on crises, but it doesn’t go backward,” Belgian Finance Minister Didier Reynders said in Wroclaw late yesterday.
--With assistance from Rebecca Christie, Rainer Buergin, Angeline Benoit, Monika Rozlal, Mark Deen, Gregory Viscusi, Jonathan Stearns and Jim Brunsden in Wroclaw, Poland. Editors: James Hertling, Patrick G. Henry
To contact the reporters on this story: James G. Neuger in Wroclaw, Poland at firstname.lastname@example.org; Christian Vits in Wroclaw, Poland at email@example.com
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