/ 11 May 2010

Germany backs euro package as markets sober up

Germany’s Cabinet approved the biggest national contribution to a $1-trillion emergency rescue package intended to stabilise the euro as global markets sobered up after Monday’s euphoria.

Relief at the European Union’s bold move to restore investor confidence gave way on Tuesday to doubts about whether weaker eurozone economies can meet their part of the bargain and deliver drastic debt cuts, driving the euro and stocks lower.

The 16-nation single currency, which surged above $1,30 early on Monday, slipped below $1,27 as traders weighed debt worries and a perceived blow to the European Central Bank’s independence in its weekend policy reversal to start buying eurozone government bonds.

The emergency plan — the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 — wowed markets with its sheer size and sparked a spectacular rally in world stocks and the euro.

Yet stock and bond markets turned cautious when they reopened for business in Asia and Europe on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area.

EU economic and monetary affairs commissioner Olli Rehn raised pressure on Italy, which has the eurozone’s highest debt after Greece as a proportion of national output, and France, which has a heavy structural budget deficit, to do more quickly to improve their public finances.

Wasting no time after having been accused for months of procrastination, German Chancellor Angela Merkel secured Cabinet backing for a share of €123-billion in loan guarantees, which could be exceeded by up to 20% if Parliament’s budget committee approves, government sources said.

‘Europe’s fools’
Conservative newspapers and the Social Democratic opposition reflected public anger and fears over the latest bail-out, warning that Berlin could not trust its eurozone partners and may end up having to foot the entire bill.

“What happens if other countries which get aid from the package drop out? Will the German share increase then?” SPD parliamentary whip Thomas Oppermann asked on ARD television.

The mass-circulation Bild daily complained in a front-page headline: “We are Europe’s fools again.”

“Angela Merkel, the Iron Chancellor, has rolled over and we are being taken to the cleaners,” it compained in an editorial.

The conservative daily Die Welt said the fundamental problem was the other eurozone countries did not share Germany’s financial stability culture.

“The eurozone is dominated by countries for whom currency stability is not so important,” commentator Joerg Eigendorf wrote. “Nothing symbolises that more strongly than the loss of the central bank’s independence. The division of power between monetary and financial policy in Europe is history.”

Greek government officials said Athens would submit a formal request for its first tranche of euro zone/IMF aid on Tuesday, seeking €14,5-billion in three-year loans ahead of a looming May 19 repayment deadline for a €8,5-billion bond.

In a sobering note, the International Monetary Fund said that even though Greece’s public debt was sustainable over the medium term, the nation whose debt woes spurred the unprecedented eurozone action faced plenty of risks.

Many economists doubt Athens will be able to implement the full austerity programme due to social unrest and believe Greece will have to restructure its debt, despite vehement denials from EU governments.

Moody’s credit ratings agency warned it might downgrade Portugal’s debt rating and further cut Greece’s to junk status, noting the contagion effect of Greece’s crisis on other eurozone members.

“Contagion has spread from Greece — historically a weaker credit in the context of the eurozone — to sovereigns with stronger credit metrics like Portugal, Ireland and Spain,” Moody’s said.

Problems postponed
Market analysts said the EU had only bought time with the standby rescue package and bond purchases, but not solved the underlying debt and competitiveness issues.

“Even though one of the worst scenarios — a Greek default — has been avoided for now, in many ways solving the bigger problems have simply been postponed and new issues could emerge in places such as Portugal and Spain,” said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

In signs of market caution, safe-haven US Treasury bonds stabilised in Asian trade after Monday’s plunge and gold prices rose towards $1 210 an ounce in Europe on risk aversion.

With many nations saddled with record deficits after they pumped trillions of dollars into their economies during the global crisis, officials from Washington to Beijing applauded Europe’s efforts to keep the crisis contained within its bounds.

In Japan, the world’s most indebted industrialised nation, government officials warned Tokyo could no longer take investors’ willingness to bankroll its spending for granted.

Japan so far has had no trouble financing its deficits, even as its public debt is forecast to reach 200% of GDP within a year or so, thanks to a vast pool of domestic savings and reliance on domestic investors to foot the bill.

But this could change, Strategy Minister Yoshito Sengoku warned, saying markets may start taking note of Japan’s debt burden, while Finance Minister Naoto Kan said next year’s new borrowing should not exceed this year’s new bond sales.

“Japan needs to draw a lesson from Greece’s problems and to take steps on fiscal discipline with a stronger sense of crisis than before,” he told a news conference on Tuesday. – Reuters