Bloomberg News

Germany Sees No ‘Bazooka’ in Crisis as Spain Yields Surge

November 23, 2011

(Updates with Merkel comments starting from the fifth paragraph. For more on the sovereign debt crisis, see EXT4.)

Nov. 22 (Bloomberg) -- Germany rejected calls from allies and investors to do more to counter market turmoil as Spain’s financing costs surged and pressure mounted on Greek political leaders to submit written commitments to austerity measures.

Bond yields in France, Spain and Italy climbed as the absence of progress toward enacting a month-old comprehensive crisis-fighting package and a dispute over the central bank’s role rattled investors. Spanish three-month bills were auctioned today at higher yields than in Greece and Portugal.

“We don’t have any new bazooka to pull out of the bag,” Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic bloc, said in Berlin today. “We see no alternative to the policy we are following,” which sees debt cuts and keeping the European Central Bank from becoming a lender of last resort, he said in an interview.

Germany is signaling resistance to stepping up Europe’s response as the debt crisis that began more than two years ago in Greece threatens France, after snaring Ireland, Portugal, Italy and Spain. While the extra yield investors demand to lend to AAA-rated France reached 200 basis points more than Germany on Nov. 17, the highest risk premium since 1990, Meister said current policies will work if given enough time.

No ‘Big Bang’

Merkel, speaking today in Berlin to members of the BDA employers’ association, said the euro region’s debt crisis “can’t be solved in a big bang.”

“We have frittered away political trust in the euro,” Merkel said. “That is why I deeply believe that you can’t restore this confidence with purely financial means, but that only a coherent political response can create this confidence.”

Merkel said the European Union will have to make swift treaty changes to deal with the situation and noted the EU summit on Dec. 9, which will deal with this issue.

The additional yield sought by investors for holding 10- year French bonds instead of benchmark German bunds widened 10 basis points to 164 basis points at 3:20 p.m. in Frankfurt. The euro rose 0.1 percent to $1.3507.

In Spain, the newly elected People’s Party called for a European agreement to “save” the nation’s debt, saying the country can’t afford 7 percent interest rates.

Spanish Rates Rise

Spain sold three-month bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago, and above the 4.63 percent for 13-week bills sold Nov. 15 by Greece, which received a bailout last year. Portugal paid 4.895 percent on three-month bills the following day.

Maria Dolores de Cospedal, the deputy leader of Spain’s People’s Party which ousted the ruling Socialists on Nov. 20, yesterday called for a euro-region accord to “save and guarantee the solvency” of Spain’s 650 billion-euro ($881 billion) debt. Spain can’t afford to “continue financing itself at 7 percent,” she said, referring to the yield on 10-year debt that led Greece, Portugal and Ireland to seek EU aid.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, increased pressure on Antonis Samaras, head of Greece’s New Democracy party, to drop his refusal to pledge written support for Greek budget cuts.

Juncker, who met Greek Prime Minister Lucas Papademos today, said Samaras’ objection risked derailing the aid payment Greece needs to keep paying its bills.

Greek Accord Needed

“Would there be no cross-party agreement, the next disbursement would not take place,” Juncker said.

Samaras says he has told officials from the EU, the International Monetary Fund and the European Central Bank that he has already taken five actions that show his full commitment to the austerity program.

An all-night summit of European leaders in October failed to end the turmoil after producing a pledge to write down Greece’s debt, recapitalize banks and strengthen the region’s rescue fund.

Underscoring discord among policy makers, ECB chief Mario Draghi criticized governments on Nov. 18 for failing to implement “long-standing decisions” to stem the crisis.

Merkel, who is calling for stronger enforcement of debt and deficit rules underpinning the euro, signaled to Christian Democratic lawmakers at a closed caucus meeting late yesterday that she won’t bend in her refusal to back joint euro-area bonds and waver from last month’s agreement, according to Volker Kauder, the bloc’s floor leader.

Markets ‘Wrong’

“If markets think that the euro is about to break up, they’re wrong,” Meister said. “We must tell markets that we are ready to defend the currency, that it has a great future and will become the strongest currency in the world.”

Global partners including the U.S. are urging European governments to stamp out the crisis that’s threatening to pull the 17-nation currency union apart, weighing on stocks and threatening to tip the world back into recession.

Euro-area leaders must reach “a momentous deal” toward fiscal and political union by mid-January to save the currency bloc, Credit Suisse said yesterday in a note to investors. “In short, the fate of the euro is about to be decided.”

--With assistance from Paul Dobson in London, Tony Czuczka in Berlin and Stephanie Bodoni in Luxembourg. Editors: James Hertling, Leon Mangasarian

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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