Europe Chiefs Clash on Euro Bonds

EU summit bogs down; leaders urge Greece to honor its commitments.

European leaders clashed over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro and offered no immediate relief for recession-wracked Spain.

The 18th summit in more than two years of crisis fighting was marked by new French President Francois Hollande’s challenge to the German-dominated deficit-cutting orthodoxy that has failed to stabilize the euro area and led to speculation that Greece might be forced out.

“We had a not unheated discussion on euro bonds,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels early today after six hours of talks. Joint borrowing “didn’t find much support, particularly in the German speaking area, but found a certain enthusiasm in the French speaking area.”

The euro declined against the dollar amid concern that divisions between France and Germany will frustrate the search for answers. The common currency traded at $1.2572 as of 7:48 a.m. in Brussels, down 0.1 percent on the day, after yesterday touching $1.2545, the lowest since July 13, 2010. Futures on the Standard & Poor’s 500 fell 0.3 percent. Yields on German five-, 10- and 30-year bonds dropped to record lows as investors sought a haven.

Leaders gave European Union President Herman Van Rompuy the job of sketching out “building blocks” for a more integrated euro area by the next summit on June 28-29 -- after a Greek election that may trigger the country’s withdrawal from the currency.

The 2012 institutional rethink comes after the setup of two rescue funds, a “Euro Plus Pact” to promote competitiveness, a “European semester” to coordinate economic policies, unprecedented European Central Bank bond purchases, two overhauls of fiscal rules and the drafting of a German-inspired deficit-limitation treaty.

Van Rompuy’s examination will extend to a possible cross-border deposit insurance scheme to underpin a banking system pockmarked by bad debt, notably on Europe’s crisis-hit periphery.

Proposals for a centralized “bank resolution” fund made little headway in the aftermath of the Lehman Brothers Holdings Inc. crisis of 2008, as each European country guarded its banks and refused to subsidize failing institutions elsewhere.


German Difficulties

“These ideas of stricter banking supervision and resolution were only mentioned, we hadn’t a real discussion,” Van Rompuy said of the leaders’ debate.

Euro bonds served as a lightning rod, with AAA rated countries such as Germany and Finland saying that joint borrowing would force up their own interest rates and give deficit-prone states an incentive to go on spending.

Germany has “huge difficulties” with euro bonds, Chancellor Angela Merkel said. On his ninth day in office and at his first European summit, Hollande backed the idea in a demonstration that the leaders of Germany and France are no longer on the same page in managing the crisis.

“Some countries are totally hostile, some can imagine them in the future, some can imagine doing them much more quickly,” Hollande said. “I was not alone.”

The leaders dedicated a separate statement to Greece, set for a new election on June 17 after voters on May 6 catapulted an anti-bailout party into second place and denied a majority to the two parties that have dominated the country since the 1970s.

Next month’s revote looms as a referendum on whether Greece stays in the euro, since an Athens government that goes back on austerity would be cut off from the next installments of the 240 billion euros ($302 billion) in aid pledged since 2010.

“We want Greece to remain in the euro area while respecting its commitments,” the leaders said in the statement. “We expect that after the elections, the new Greek government will make that choice.”

Greece came up at the end of the summit that focused on growth-boosting measures, and an official said there was no discussion of Spain, the euro zone’s fourth-largest economy.

Spanish Prime Minister Mariano Rajoy is fighting the triple threat of recession, higher-than-targeted deficits and a banking system hobbled by about 184 billion euros of what the Bank of Spain calls “problematic” assets that plummeted when the real-estate bubble burst.

The Spanish government, making the fourth attempt in three years to shore up banks, has so far ruled out tapping rescue funds since that would tie Spain to the same sort of conditions as Greece, Ireland and Portugal, the three countries in formal aid programs.


Rajoy’s Plea

Rajoy pleaded with the central bank to restart a bond-purchase program that it mothballed in the face of German-led opposition. So far, the ECB has stockpiled 212 billion euros of government bonds to cap interest rates in hard-hit countries.

“I insist it is up to the ECB to take this decision that it has already taken in the past,” Rajoy said. “This question has a huge importance at the moment, much more than the future design of the European Union.”

Spanish 10-year bond yields rose 12 basis points to 6.20 percent yesterday. Spain pays 482 basis points more than Germany to borrow, an extra cost that Rajoy said will nullify the savings derived from spending cuts. The risk premium reached a euro-era record of 490 basis points on May 17.

Asked whether the Spanish leader made that appeal during the meeting, ECB President Mario Draghi said: “No he didn’t. This liquidity could be provided by other sources as well.”


Bloomberg News

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