Europe’s leaders today cap their latest effort to check the financial crisis that claimed Cyprus this week as its fifth victim.
Euro-area finance ministers set the stage for today’s gathering in Brussels of the European Union’s 27 chiefs, approving Cyprus’s bailout and detailing how they would aid Spanish banks. Consensus breaks down on safeguarding governments in Spain and Italy, with German Chancellor Angela Merkel rejecting calls to do more to cut their borrowing costs.
“People have been imagining too many moments of truth over the past few years, and Europe has been able to continue kicking the can,” said Sebastian Paris-Horvitz, chief market strategist at HSBC Private Bank Suisse in Paris. “The issue today is that indeed the problem has become much bigger. We are not talking about tiny Greece but big Spain and even bigger Italy.”
Merkel is increasingly isolated as French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy unite to push for quicker action to ease the crisis that emerged in Greece in late 2009. The three leaders back the creation of euro bonds and are pushing for measures to spur growth. Merkel met Hollande last night in Paris and will travel to Rome to meet 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 yesterday in London. “The timeframe for financial crises is days. The timeframe for structural reforms is years.”
Stocks and the euro dropped before the summit. The Stoxx Europe 600 Index retreated 1 percent to 243.5 as of noon in Brussels. The euro fell 0.35 percent to $1.2425.
Italy today paid a yield of 6.19 percent in an auction of 10-year debt, the most since December. The Treasury also sold a five-year bond to yield 5.84 percent, compared with 5.66 percent last month.
The EU leaders are due to discuss a plan seen playing out over more than a decade for closer European integration. The blueprint, written by EU President Herman Van Rompuy, centers on common banking supervision and deposit insurance, along with a “criteria-based and phased” move toward joint debt issuance. The blueprint also suggests that the EU could impose upper limits on annual budgets and debt levels of nations that use the euro.
Merkel, also the focus of pressure at the Group of 20 nations summit 10 days ago, yesterday shut the door to joint euro-area bonds as a means of lowering Spain and Italy’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 Rajoy made a plea for help for Spain at the summit, Merkel said that 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 yesterday. “Oversight and liability have to go hand in hand. There can only be joint liability when adequate oversight is ensured.”
Finnish Prime Minister Jyrki Katainen said “new structures” are needed in the euro area to combat the sovereign-debt crisis.
“We have to be open minded when looking at the future of the euro area and the future of the EU but it doesn’t mean that we should mutualize liabilities,” Katainen told reporters today in Brussels, adding “We don’t like euro bonds.”
Spanish 10-year bond yields rose to 6.97 percent, nudging the 7 percent level that forced Greece, Ireland and Portugal to call for sovereign bailouts. Equivalent German bonds yield about 1.5 percent.
A German government official shrugged off those rising borrowing costs, telling reporters in Berlin today that bond yields go up and down. Italy and Spain have financed much of their needs for the year so there is no need for excessive panic, the official said on condition of anonymity because the summit negotiations will be private.
“It is not enough that we paint the future differently but we need to make the decisions that we need right now,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels late yesterday.
Merkel doesn’t plan to extend her stay at the summit through this weekend, the German official said. Merkel is due to return to Berlin tomorrow and doesn’t expect to change her plans, the official said.
Cyprus, which may need as much as 10 billion euros due to the damage to its banking system from losses on Greek bonds, won’t withdraw its bailout request, a possibility that had been reported in local media, Finance Minister Vassos Shiarly said.
While pursuing EU aid, Cypriot officials have investigated the prospect of a loan from Russia or China. Shiarly said this search will continue.
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.”
Spain formally requested a European bailout for its banks on June 25, gaining a credit line of as much as 100 billion euros ($125 billion). The finance ministers yesterday estimated the need at as much as 62 billion euros, which could be provided by the temporary bailout fund, the European Financial Stability Facility, until the permanent European Stability Mechanism is up and running. The bailout program would then be transferred to the ESM.
Whether the aid would take precedence over other debts in the event of default may have to be settled by the government chiefs as finance ministers from Germany, Finland and the Netherlands resisted pressure to drop that condition.
Juncker, who chairs the group of the 17 euro finance chiefs, signaled a possible agreement. “I expect that we can calm markets on this point in the coming days,” he said.
Rajoy said he will fight so that rescue loans “aren’t superior to the rights of other creditors of public debt.”
The Spaniard also backs a so-called banking union, which he says includes joint deposit-guarantee funds and would allow Europe’s rescue funds to recapitalize banks directly without going via the government. German officials have rejected those proposals.
“It all hinges on her,” said Ferguson of Merkel. “She has to realize the cost of disintegration to Germany would be mind-blowing.” Whatever happens, “Germany pays,” he said. “Do they pay through massive defaults or fiscal transfers?”