Europe’s Leaders Race to Tackle Crisis

Spanish, Italian bonds rally on speculation that policy makers will act.

European leaders hunted for solutions to the debt crisis, helping Italy and Spain gain a respite from the market turbulence after the resumption of the European Central Bank’s bond-buying program.

With global stock markets sinking for an eighth day, German Chancellor Angela Merkel and French President Nicolas Sarkozy plan to speak by phone later today, their offices said. The European Commission called for an expansion of the European Financial Stability Facility, the 440 billion-euro ($623 billion) rescue fund, earning a rebuke from Germany.

The EFSF “should be reinforced and the scope widened,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels. “Experience has shown that we need to stand ready” to act, “preferably ahead of the curve, to be effective.” German Economy Minister Philipp Roesler rejected taking more measures.

Europe’s government leaders were back in the spotlight after a divided ECB restarted its bond-purchase program yesterday following a four-month hiatus. The central bank refused to extend the purchases to Italy and Spain, the two countries at the center of the current turmoil.

“Would the ECB please get serious?” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in an e-mailed note. Limiting the bond-buying to Ireland and Portugal brings to mind “a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire.”


Merkel-Sarkozy Call
World stock markets have lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes.

Merkel and Sarkozy, the leaders of the euro region’s two largest economies, plan to address the crisis when they speak today, a Chancellery aide said. The French leader also planned to call Spanish Prime Minister Jose Luis Rodriguez Zapatero.

The technical and political details of revamping the main bailout mechanism will be completed by early September, Rehn said. Policy makers need to be “more disciplined” in communicating their actions, he said, adding that European leaders had not anticipated the market developments.

“Markets have not reacted as we expected or hoped for to the measures agreed by euro-area heads of state and government on 21 July,” Rehn said. “The spread of bond-market tensions across the euro area is, however, not justified by economic and budgetary fundamentals.”


Bonds Rally
Spanish and Italian bonds rallied on speculation that policy makers may take more action to arrest the crisis. Spanish 10-year yields dropped 22 basis points to 6.06 percent, while similar maturity Italian debt declined 4 basis points to 6.16 percent.

The euro was up 0.4 percent at $1.4153 at 1:55 p.m. in Berlin.

Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. It did so again today, according to two people with knowledge of the transactions. The ECB stopped short of buying Italian bonds, and ECB President Jean-Claude Trichet said Italy has to show it is “ahead of the curve” in taming its debt.

A clash over the size of the bailout fund flared between European officials and Germany, the biggest underwriter of aid packages to Greece, Ireland and Portugal.

A call by Jose Barroso, commission president, for a review of “all elements” including the fund’s size was rejected today by Germany’s Roesler.


‘Frantic Ranting’
“A debate like this is not timely,” less than a month after European leaders agreed to leave its size untouched, Roesler told Deutsche Presse-Agentur in Oslo. His predecessor, Rainer Bruederle, now floor leader of Merkel’s Free Democratic Party coalition partner, dismissed Barroso’s proposals as “frantic ranting,” he told Bild newspaper.

The commission is pressing European governments to quickly enact last month’s decision to empower the rescue fund to buy bonds in the secondary market, offer precautionary credit lines and lend to recapitalize banks.

Country-by-country approval of the strengthened EFSF is delayed until after parliaments return from the summer break.

With a “huge amount of work” involved already, calling in parliament early or “loading new proposals onto us is just not going to fly,” Norbert Barthle, budget policy spokesman for Merkel’s Christian Democratic bloc in parliament, said by phone. “I’m not saying new proposals can’t be discussed at some point, save one: eurobonds. Any mention of eurobonds from the German point of view is taboo, damaging, undesired.”


Bloomberg News


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