Bloomberg News

Europe Focus Shifts to Debt-Crisis Firewall

February 27, 2012

The European Central Bank prepares a second round of cash lending to help shore up the region’s banks. Photographer: Hannelore Foerster/Bloomberg

The European Central Bank prepares a second round of cash lending to help shore up the region’s banks. Photographer: Hannelore Foerster/Bloomberg

European leaders will shift their focus this week from a Greek bailout to the prospect of bolstering the region’s firewall against debt-crisis contagion as they ready for their latest summit.

After lawmakers in Germany and Finland vote on approving the second Greek rescue package today and Feb. 29, European Union heads of government will turn to their March 1-2 summit in Brussels. Leaders of the 17-member monetary union have said they’ll decide in March whether to lift a 500 billion-euro ($672 billion) limit to bailout funding.

As the European Central Bank prepares a second round of cash lending to help shore up the region’s banks, policy makers are focused on preventing a Greek collapse in order to take advantage of signs of an improved global economy.

The latest Greek bailout “gives the opportunity of euro- zone leaders to put a better, more organized and larger firewall in place,” William Rhodes, chief executive officer of William R. Rhodes Global Advisors, said in a Feb. 24 interview on Bloomberg Radio’s “The Hays Advantage.”

Chancellor Angela Merkel’s government has resisted proposals to increase bailout funding by topping up the 500- billion-euro European Stability Mechanism, the permanent fund scheduled to be set up this year. Euro leaders are considering diverting funds from the temporary bailout mechanism, the European Financial Stability Facility, to increase the region’s resources in fighting the crisis.

G-20 Rebuff

German Finance Minister Wolfgang Schaeuble rejected calls to make rescue funds “ever bigger.” In a Feb. 24 op-ed in Mexican newspaper El Universal, he said that Germany’s response to such calls was an “emphatic no.” The resistance created an impasse as Germany tried to rally Group of 20 nations to find fresh money for the International Monetary Fund to help defuse the crisis at a meeting in Mexico City over the weekend.

G-20 nations, led by the U.S., isolated Germany and refused to come to Europe’s rescue, saying any decision on outside help will hinge on euro governments delivering more financial firepower. A European review of its resources is “essential” before considering boosting IMF funding, the G-20 said.

Stocks and the euro fell. The Stoxx Europe 600 Index retreated 0.9 percent as of 9:33 a.m. in London. The euro declined 0.2 percent to $1.3427.

German Position

Merkel spokesman Steffen Seibert said Feb. 25 there was no change in the German position that there’s no need to raise the funding limit, rebutting a report in Germany’s Focus magazine. Focus had said Merkel’s government was prepared to concede and allow 250 billion euros in additional funding from the remaining volume of the EFSF.

Euro leaders will also try to steer focus toward assisting economic growth, fending off criticism that the answer to the debt crisis has rested too much on austerity. Merkel and Luxembourg Prime Minister Jean-Claude Juncker said on Feb. 24 that leaders will seek growth through changes in labor-market policies and scaling back bureaucracy.

“It’s clear that things in Greece -- and also elsewhere, but primarily in Greece -- cannot move toward a better future if there aren’t also growth impulses,” Juncker said alongside Merkel in the chancellor’s constituency on the Baltic Sea.

ECB Loans

The ECB’s issuance of three-year cash to banks has been credited with easing credit pressure on banks, giving euro leaders more room to maneuver. Euro-area banks may tap the Frankfurt-based central bank for 470 billion euros on Feb. 29, almost as much funding as they took in December, according to a the median of 28 estimates in a Bloomberg News survey.

That earlier operation helped a rally in bond markets, which continued last week. Italy’s 10-year bonds rose for a seventh week, the longest run of gains in the euro-era, with the yield down nine basis points to 5.49 as of Feb. 24. Spanish 10- year yields dropped 21 basis points last week to 5.05 percent.

The success of European leaders will determine whether the economic chaos in Greece spreads to the larger countries.

“The real big issue going forward will be the success of Spain and Italy,” World Bank President Robert Zoellick said in a Bloomberg television interview in Singapore Feb. 25. “The good news is we’ve got some very reformist governments in both countries. They are not only undertaking fiscal discipline but they have started undertaking structural reforms.”

This week’s activities will begin with Merkel today addressing German lawmakers in the lower house of parliament, or Bundestag, at 3 p.m. Berlin time before a vote on approving the Greek package. Schaeuble and other government officials have predicted a majority, as the opposition Social Democratic Party has signaled it will support the measure.

Volker Kauder, the parliamentary leader of Merkel’s Christian Democratic-led bloc, reiterated that Germany doesn’t want to force Greece out of the euro area.

“We want to keep Greece in the euro zone,” Kauder said in an interview with ARD television yesterday. Trying to make the country leave would be the “wrong signal.”

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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


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