Europe's leaders plan a week of intensive shuttle diplomacy to help defuse the continent's debt crisis, amid dissension on the European Central Bank's role and how to help Greece.
With the single currency's continuing crisis threatening the global economy, Jean-Claude Juncker, the Luxembourg premier who heads the group of euro-area finance ministers, is expected in Athens on August 22 to discuss Greek Prime Minister Antonis Samaras' request of a two-year extension for the country's fiscal adjustment program. Samaras travels to Berlin and Paris on August 24 and 25 after French President Francois Hollande and German Chancellor Angela Merkel meet in the German capital on August 23.
Europe's leaders are returning from vacation with agreement still elusive on measures to support Greece and to prevent Spain and Italy being shut out of sovereign debt markets. Spain urged unlimited ECB support over the weekend after its 10-year bonds last week advanced for the first time this month, as Merkel signaled conditional support for the ECB's plan to help reduce indebted countries' borrowing costs.
The sovereign-debt crisis mustn't become a “bottomless pit” for Germany, even though Europe's biggest economy would pay the highest price in a breakup of the euro region, German Finance Minister Wolfgang Schaeuble said on August 18 during his ministry's open day in Berlin. “There are limits,” he said, as he ruled out another aid program for Greece.
The ECB's governing council may decide at its next meeting in early September to set yield limits on the debt of each country, Spiegel reported yesterday, without saying where it got the information. Given the bank's ability to print money, it will have unlimited funds to buy the securities and prevent speculators from driving interest rates over the set rate, Spiegel said. An ECB official declined to comment on the report.
German 10-year bund prices fell last week on the view the European Central Bank and European Union will take steps to bail out the Iberian nation. Expectations of European economic stimulus drove the region's stocks to the highest level in 13 months.
ECB President Mario Draghi said earlier this month the central bank could purchase sovereign debt alongside euro-area bailout funds. While the ECB said that it would undertake bond purchases only if countries applied for similar support from Europe's rescue fund and accepted strict conditions in return, Italy and Spain have yet to decide whether they'll request help.
ECB bond buying on the secondary market should be unlimited in duration and size to support Spain's debt, Economy Minister Luis de Guindos told the Spanish news agency Efe in an interview on August 18. Terms for the assistance will be discussed at a euro area meeting in the second week of September.
Any new conditions aren't expected to differ much from what Spain has already planned through 2014, de Guindos said. A budget outline sent to the European Commission on August 3 sets out cuts of more than 100 billion euros ($118 billion), reducing the shortfall for the euro area's third-largest economy to 2.8 per cent of gross domestic product in 2014, from 8.9 per cent last year.
Prime Minister Mariano Rajoy, who returns to work today from a two-week summer break, reiterated on August 14 he would consider a bailout if it were in the “best interests of Spaniards.” The country has so far taken 100 billion euros of European loans to aid its banks, as Rajoy struggles to restore investor confidence amid the second recession since 2009.
Italian Prime Minister Mario Monti said yesterday the country's elevated bond yields result from external concerns about the future of the euro.
The Cabinet had aimed for “a quicker drop in yields,” Monti said in Rimini, Italy. That didn't happen “for a number of reasons that were not so much due Italy but due to lower confidence toward a problem-free continuation of the euro.”
Italy's 10-year yields are at 5.79 per cent, more than 4 percentage points higher than similar-maturity German bond yields.
While southern European euro members agree on the need for ECB action, Schaeuble rejected suggestions that the bank should finance government debt.
“Many are telling us now to turn a blind eye to debt reduction” to save the euro, he said on August 18. This “would only postpone the problem to tomorrow.”
The ECB may disappoint investors by limiting the size of potential bond purchases and may force Spain and Italy to sign a memorandum of understanding, according to a Daiwa Capital Markets Europe note published on August 17.
“Contrary to the expectations of many market participants, we do not think the ECB will announce an interest-rate or spread target for short-dated peripheral government bonds” and may “announce a volume of future bond purchases instead,” London- based economists Tobias Blattner and Grant Lewis wrote.
Policy makers are struggling to smooth divisions as they await a German high court decision on bailout funding next month. The euro's permanent rescue fund, the 500 billion-euro European Stability Mechanism, won't become active until Germany's Federal Constitutional Court rules on its viability on Sept. 12. Only with a court endorsement will the German government be able to ratify the ESM treaty.
The monthlong wait for the decision will be paralleled by anticipation on whether Greece continues to receive euro rescue funds. Greece's troika of international creditors -- the ECB, the European Commission and the International Monetary Fund -- will return to Athens in early September to assess progress as the Samaras administration seeks to hammer out 11.5 billion euros in budget cuts for 2013 and 2014.
Greece may need to cut as much as 14 billion euros over the next two years to meet its deficit targets due to setbacks in planned privatizations and lower tax income, Spiegel reported yesterday, citing an interim report by the troika. An IMF spokeswoman based in Washington declined to comment on the report.
“There's a process we're engaged in to evaluate the efforts made by Greece in recent months, which we know was set back by elections,” France's European Affairs Minister Bernard Cazeneuve said yesterday. “It's important to let the Greeks express their request clearly, to let the Troika report and then to hold discussions between European countries to find the right position.”