BRUSSELS: A dispute over creating joint eurozone bonds to help weak European nations threatened Wednesday to creep into an EU summit aimed at preventing future debt crises amid fresh fears over Spain’s economy.
The head of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, said he may raise the issue when European Union leaders hold talks in Brussels on Thursday and Friday. Concerns about the eurozone’s health deepened after Moody’s ratings agency warned that it may downgrade Spain’s sovereign debt again, fuelling fears that the country could be next in line for a bailout after Greece and Ireland. In Greece, thousands of protesters took to the streets in protests marred by violence to denounce drastic austerity measures that the government launched in return for a 110 billion euro rescue from European partners and the IMF. The euro slid and stock markets wobbled on Wednesday while the borrowing costs of Spain and Portugal rose after Moody’s issued its warning about Madrid’s debt. The Standard & Poor’s agency made a similar warning to Belgium on Tuesday.
EU leaders are set to agree on limited changes to the 27-nation bloc’s Lisbon Treaty to create a permanent financial backstop to avoid new debt debacles, replacing a temporary 440 billion euro fund in 2013.
The joint bond idea was expected to be off the table after it was rejected by eurozone powerhouses Germany and France, but Juncker said in an interview that he will raise the issue “if the opportunity arises” at the summit.
“For a systemic crisis you need a systemic response,” Juncker said. “So I believe that when the day comes, we will come back to this proposal. I have no doubt at all that we will come back to it.” He also downplayed chances that the summit would agree to pump more money into the temporary European Financial Stability Facility (EFSF), noting that several governments believe it is sufficiently funded.
Belgian Finance Minister Didier Reynders, whose country holds the rotating EU presidency until December 31, said the new fund should be bigger than the EFSF to fend off fears it is under-funded. “It would be absurd to have made so much effort and be caught up by a default in one country,” he said. Analysts have questioned whether the EFSF would be sufficient to bailout Spain, the eurozone’s fourth largest economy.
Last week, Juncker and Italian Finance Minister Giulio Tremonti revived the idea that eurozone states issue joint bonds to help weaker eurozone countries beset by high interest rates after the Greek and Irish debt bailouts. Juncker has called Germany “un-European” for rejecting so-called E-bonds. Germany enjoys the lowest sovereign bond yields in Europe thanks to strong investor confidence in its fiscal health and ability to repay its debts. Berlin says joint eurozone bonds would weaken states’ rigour in bringing their finances in order and force Germany to pay higher returns to investors on its own debt to offset the increased risk they pose for repayment.
