Bloomberg News

France Renews Push for ECB to Finance Euro Fund as Yields Jump

November 17, 2011

Nov. 17 (Bloomberg) -- French Finance Minister Francois Baroin said central bank support for Europe’s recue fund remains the best way to counter the regional debt crisis, re-opening a clash with Germany as investors shun much of the region’s debt.

“We consider that the best way to avoid contagion is to have a solid firewall” by giving the fund a bank license, Baroin said in a speech in Paris late yesterday. “We haven’t won the argument. We won’t make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe.”

Baroin’s comments underscore French unease as the debt crisis moves to the euro region’s second-largest economy. The extra yielded demanded by investors to hold French 10-year bonds over German bunds widened to a euro-era high today. As global leaders step up calls on Europe to find a fix, the French stance runs into resistance from Chancellor Angela Merkel’s government, which opposes enlisting further support from the European Central Bank.

The ECB “doesn’t have the possibility of solving the euro problem,” Merkel told reporters in Berlin yesterday. Wolfgang Franz, who heads her council of economic advisors, called monetization of government debt “one of the deadly sins” for a central bank in an interview with the Frankfurter Allgemeine Zeitung published today.

The Frankfurt-based ECB itself has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB’s remit.

French Spread

The clash is intensifying as France, the second-biggest backer of the European Financial Stability Facility after Germany, is dragged more deeply into the crisis that began more than two years ago in Greece and has in the past week led to the ousting of Italy’s Silvio Berlusconi.

The premium France pays over Germany to borrow for 10 years jumped to 200 basis points today, the highest since 1990. Yields on Dutch, Finnish and Austrian debt also increased this week.

France’s 10-year government bonds now yield about 3.7 percent, compared with 2.2 percent for U.K. gilts and 2 percent for U.S. treasuries.

Both the U.K. and the U.S. governments are benefiting from bond purchases of the Bank of England and the Federal Reserve and Baroin cited those programs as examples that Europe should follow.

Obama’s Concern

President Barack Obama said financial-market turmoil will continue until European leaders persuade investors they have a convincing plan. Bank of England Governor Mervyn King and the U.K. Treasury said Europe’s woes are the biggest threat to the British economy.

“I’m deeply concerned, have been deeply concerned -- I suspect will be deeply concerned tomorrow and next week and the week after that,” Obama said yesterday during a visit to Canberra.

The current market rout comes three weeks after European leaders completed an all-night summit to bolster their rescue efforts. They agreed to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what they called a comprehensive approach intended to end the crisis.

That effort is unlikely to be enough and requires further support from the ECB, according to Citigroup Chief Economist Willem Buiter.

“The only remaining show in town is the ECB,” Buiter said yesterday on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “They may have to hold their noses but they will have to do it,” he said. “The notion that they can’t do this because of their price mandate is nonsense.”

Sarkozy had earlier backed down over the role the ECB should play in fire fighting, acknowledging Germany’s inter-war experience of hyperinflation, to help obtain the Oct. 27 accord among European leaders. “Germany has historic, almost sociological concern about central bank intervention,” Baroin said in Paris.

Buiter, a former member of the Bank of England’s monetary policy committee, suggested that Germany should look beyond that experience. “We’re not asking for Weimar,” he said.

--Editors: Alan Crawford, John Fraher

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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