admin“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” economic and monetary affairs commissioner Olli Rehn said yesterday as EU finance ministers met.
Eurozone ministers agreed on Tuesday night on detailed plans to leverage its bailout fund the European Financial Stability Fund (EFSF), but could not say by how much because of rapidly worsening market conditions, which prompted them to look to the IMF.
Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels yesterday, as markets assessed the rescue fund boost as inadequate.
Stocks fell and the euro weakened after rating agency Standard & Poor’s hit some of the world’s leading banks with a credit downgrade.
“It must also be remembered that the EFSF is already funding at very wide (borrowing) levels over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France,” Rabobank strategists said in a note.
“This must call into question any plans related to the EFSF. It is yesterday’s solution and the market has simply moved on.”
Two years into Europe’s sovereign debt crisis, investors are fleeing the eurozone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.
“We are now looking at a true financial crisis — that is a broad-based disruption in financial markets,” Christian Noyer, France’s central bank governor and a governing council member of the European Central Bank (ECB), told a conference in Singapore.
The 17-nation Eurogroup adopted detailed plans to insure the first 20 percent to 30 percent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy eurozone government bonds.
Both schemes would be operational by January with about euro 250 bn from the EFSF available to leverage after funding a second rescue programme for Greece, Eurogroup chairperson Jean-Claude Juncker said.
The aim was for the IMF to match and support the new firepower of the EFSF, Juncker told a news conference.
But with China and other major sovereign funds cautious about investing more in eurozone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.
“It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along,” Regling said.
Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis.
The prospects of drawing the IMF more deeply into supporting the eurozone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender.
The United States, Japan and other Asian states are hesitant to chip in unless Europe commits to first use its own resources to fix the problem and peripheral eurozone states map out more concrete steps on fiscal and economic reforms.
“Nobody wants to spend money on something they doubt would work,” a G20 official said. “That goes not only for Europe but for any other country outside Europe. The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won’t do.”
New Italian Prime Minister Mario Monti outlined his plans to the eurozone ministers and was told he would have to take extra deficit-cutting measures beyond an austerity plan already adopted to meet its balance budget promise in 2013.
Italian bond yields are now above the levels at which Greece, Ireland and Portugal were forced to apply for EU/IMF bailouts, and Rome has a wall of issuance due from late January to roll over maturing debt.
The Eurogroup ministers agreed to release their portion of an euro 8bn aid payment to Greece, the sixth instalment of euro 110 bn of EU/IMF loans agreed last year and necessary to help Athens stave off the immediate threat of default. — News24.
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