Merkel Shuts Door to Euro Bonds

German chancellor calls joint euro-area bonds ‘wrong way’ to achieve greater integration.

German Chancellor Angela Merkel shut the door to joint euro-area bonds as a means of lowering Spain’s borrowing costs, saying they are the “wrong way” to achieve the greater European integration needed to stem the debt crisis.

Speaking three hours after Spanish Prime Minister Mariano Rajoy made a plea for a summit of European leaders to use all available tools to help Spain service its debt, Merkel said euro bonds, euro bills and debt redemption funds are unconstitutional in Germany and economically “wrong and counterproductive.”

“I fear that at the summit there will be much too much talk about mutual liability and far too little about improved oversight and structural measures,” Merkel told lower-house lawmakers in Berlin today. “Oversight and liability have to go hand in hand. There can only be joint liability when adequate oversight is ensured.”

Merkel is under growing pressure from her European and global counterparts to soften her opposition to debt sharing in the euro area and do more now to cut borrowing costs for Spain and Italy. Rajoy, outlining his own goals for the June 28-29 European Union summit in Brussels, said that Spain can’t go on financing itself at current borrowing rates for long.

“The most important thing today is being able to finance ourselves in the markets, that’s the main issue,” Rajoy said in Parliament in Madrid. “And on that point Spain, Italy and other countries are going to push for reasonable decisions to be made” at the summit using the “available instruments.”

Spanish 10-year bond yields were little changed at 6.86 percent after jumping 24 basis points yesterday. Equivalent German bonds yielded about 1.55 percent.

European stocks rebounded from a four-day retreat, with the Stoxx Europe 600 Index climbing 0.5 percent as of 1:29 p.m. in Berlin. The euro was little changed at $1.2488.

EU leaders will discuss a plan for closer European integration spearheaded by EU President Herman Van Rompuy that centers on common banking supervision and deposit insurance along with a “criteria-based and phased” move toward joint debt issuance. It also suggests that the EU could impose upper limits on annual budgets and debt levels of nations that use the euro.

While Merkel said that she welcomed the Van Rompuy proposals and agreed with his four building blocks toward integration, she rebuffed any notion Germany shoulder the cost.

“I decisively reject the presumption in this report that the principle of collectivization takes priority,” she said. Rather, individual countries must “keep to agreed rules” and raise their competitiveness through structural reforms, using the best in Europe as the standard “rather than mediocrity.”

 

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“The sovereign debt crisis shows us daily that deficiencies in one euro-zone country can cause difficulties in the entire euro zone,” Merkel told the lower house, or Bundestag. “It also shows us that national answers aren’t enough to secure the euro area’s stability.”

Merkel is increasingly isolated as Rajoy, French President Francois Hollande and Italian Prime Minister Mario Monti unite to push for quicker action to ease the sovereign debt crisis that emerged in Greece in late 2009. The three leaders back the creation of joint euro-region bonds, which Merkel opposes, and are pushing for measures to spur growth. Merkel is due in Paris later today for talks with Hollande, and will travel to Rome to meet with Monti on July 4.

“The key negotiators, including the German chancellor, do not really understand the timeframe we’re working under,” Niall Ferguson, a professor of economic history at Harvard University, said at a conference in London today. “The timeframe for financial crises is days. The timeframe for structural reforms is years.”

Spain formally requested a European bailout for its banks on June 25 and discussions continue as to what conditions lenders will have to meet and whether the loan of as much as 100 billion euros ($125 billion) would take precedence over other debts in the event of default.

Rajoy said he will fight so that European rescue loans “aren’t superior to the rights of other creditors of public debt.” Germany, Finland and the Netherlands want official loans to Spain to be repaid first in the event of default, undermining the interests of existing bondholders, two European officials said this week.

Rajoy also backs a so-called banking union, which he says includes joint deposit-guarantee funds and would allow the European rescue funds to recapitalize banks directly without going through the government. German officials have also rejected those proposals.

“It all hinges on her,” said Ferguson of Merkel. “She has to realize the cost of disintegration to Germany would be mindblowing.” Whatever happens, “Germany pays,” he said. “Do they pay through massive defaults or fiscal transfers?”


 

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