Tags: Germany Rules Out Fund Buybacks as Leaders Plan Summit Pledge

Germany Rules Out Fund Buybacks as Leaders Plan Summit Pledge

Wednesday, 02 Feb 2011 09:39 AM

Germany ruled out allowing the European Union bailout facility to fund bond buybacks from debt-strapped governments as euro-area officials struggle to narrow differences on a strategy to end the region’s financial crisis.

A German government official briefing reporters before a Feb. 4 EU summit said the 440 billion-euro ($607 billion) European Financial Stability Facility lacks the legal authority to purchase the outstanding debt to ease finances of countries including Greece. European officials have said such measures are being considered as part of a revamped crisis strategy.

The euro reached a three-month high today and bond-risk premiums for Spain, Portugal, Italy and Belgium narrowed for a third day as investors bet Europe would succeed in reinforcing its arsenal to battle the year-old crisis. Leaders are preparing a pledge to defend the euro, seeking to keep markets at bay until a late-March deadline to bridge differences over budget rules, rescue-loan rates and buybacks.

“The current market situation is one of expectations,” Greek Finance Minister George Papaconstantinou said in an interview in Athens today. “It would be a big mistake to conclude an agreement that falls short of these expectations.”

The one-day gathering in Brussels will review debt-crisis options and reaffirm a self-imposed March 25 target to strengthen the bailout fund, set up a permanent rescue mechanism and proclaim new rules against fiscal slippage, EU President Herman Van Rompuy said.

‘Efficient, Flexible’

French Finance Minister Christine Lagarde said on Jan. 28 there was no consensus among EU finance ministers on buybacks in their talks to make the fund more “efficient, flexible.”

While Germany was committed to bolstering the fund, the official said German Chancellor Angela Merkel and French President Nicolas Sarkozy would propose at the summit a package of measures intended to boost the euro region’s competitiveness.

Euro-region governments must improve economic policy coordination to try to level differences in competitiveness, using gauges such as tax rates and wages, the official said.

He also said euro-area governments must give priority to restoring public finances, citing the constitutional debt limits adopted by Germany in 2009 as a model.

Germany, the biggest of the 17 euro nations, is making its assent to the expanded rescue effort conditional on tougher controls of countries’ finances, say four officials involved in the talks who declined to be named because the deliberations aren’t public. Existing budget rules have gone unenforced since the euro’s debut in 1999.

Direct Bond Purchases

While direct purchases of distressed countries’ bonds in the primary market will be part of the toolkit, other pieces -- such as lower interest rates on aid and boosting the EFSF’s firepower -- have yet to fall into place, the officials said.

Buying bonds directly instead of offering bailout loans, as the emergency fund does now, may enable struggling countries to retain access to markets and escape the stigma of dependence on rescue financing, said the people.

Bond purchases were the original declared purpose of the European Financial Stability Facility, which was cobbled together on a May weekend after a hastily engineered 110 billion-euro loan package for Greece failed to calm markets.

Germany scuttled that approach, retooling the EFSF to offer loans so it would have more leverage to force countries receiving aid to cut budget deficits and overhaul their economic management.

Plans to reinforce the fund have been driven by a German reconsideration under way since Merkel’s insistence on losses for private bondholders helped push Ireland into a bailout in November.

Fund’s Firepower

Cash buffers and guarantees cap EFSF lending at around 250 billion euros, depriving it of the firepower to buy back enough outstanding bonds to make a difference to the most debt-mired nations. While officials are discussing ways to get the AAA- rated fund up to its stated potential, there’s no proposal on the table to increase its headline figure.

Under what was designed as a stopgap policy in May, the European Central Bank has bought 76.5 billion euros of bonds of countries such as Greece, Ireland and Portugal to maintain a lid on their borrowing costs.

As the ECB refocuses on stemming inflation, which accelerated to a two-year high of 2.4 percent in January, political leaders are looking to relieve it of the bond-market interventions that were never part of its core mission.

In a sign that the immediate pressure is off, the ECB didn’t do any buying last week, its first absence from the debt markets in three months. The euro reached $1.3862, the highest since Nov. 9, before slipping 0.3 percent to $1.3788 at 3:10 p.m. in Berlin.

Bond Gains

Portugal’s 10-year bond yield fell 12 basis points to 6.81 percent today, trimming the extra yield over German debt to 360 basis points, the lowest since Dec. 21. Portugal sold 1.255 billion euros of bills today at declining borrowing costs.

Spain’s AA credit rating was affirmed yesterday by Standard & Poor’s, which said its outlook remained “negative.” Spain’s 10-year yield spread over German bonds slid 10 basis points to 184 basis points today, the lowest since Nov. 3.

Spain will “never” need a bailout, Deputy Finance Minister Jose Manuel Campa said today on Bloomberg Television’s “The Pulse” with Andrea Catherwood. Economy Minister Elena Salgado told Onda Cero radio it would be “beyond all logic at the moment” to request an IMF credit line.

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Germany ruled out allowing the European Union bailout facility to fund bond buybacks from debt-strapped governments as euro-area officials struggle to narrow differences on a strategy to end the region s financial crisis.A German government official briefing reporters...
Germany Rules Out Fund Buybacks as Leaders Plan Summit Pledge
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