Pressure on Germany and France to take radical action on the euro zone debt crisis mounted on Friday, as financial markets sagged further and Belgium added its support to calls for the region to issue debt jointly. Belgian Finance Minister Didier Reynders said the bloc should issue common euro bonds and expand its bailout fund to calm repeated market sell-offs of government bonds and bank shares of vulnerable debtor countries. Germany has led resistance to both proposals. Belgium’s support for bonds promoted by high-debt nations such as Italy and backed by some European Commission officials will not necessarily tip the balance.
But Reynders’ call in the Financial Times for the euro zone had to prove it had “deep pockets” underlined increasing fears among euro zone governments that they would be unable to reassure investors that euro zone banks are safe without drastic action by the 17-nation bloc.
Merkel repeated her criticism of proposals for euro zone bonds, telling a rally of her Christian Democrats this was a “slippery slope” that would probably leave everyone worse off. “Euro bonds would not allow any rights at all to intervene to force discipline on others,” she said. French Prime Minister backed her view, writing in an editorial published in daily Le Figaro that common euro zone bonds without further fiscal consolidation could threaten France’s triple-A credit rating. Bickering over the latest Greek bailout and lingering disappointment over Wednesday’s Franco-German summit helped drag European shares to near two-year lows on Friday. Fears that major world economies are heading for recession are adding to worries that euro zone banks face short-term funding troubles, losses from sovereign debt and weak trading income. Greece, at the center of the euro zone debt storm, also announced its economy would shrink by more than previously thought – by 4.5 per cent this year against an earlier estimate of 3.8 to 3.9 per cent. “The best way to resolve a debt crisis is to grow out of it so a recession certainly would not help. I think the confidence element is very important now,” said ING economist Martin van Vliet. “It’s time to break the downward spiral of a self-fulfilling recession. We are in that stage right now.”
Spain’s announcement of further austerity measures and a move to support its stricken housing market, aimed at showing it was working hard to stay out of the debt crisis, had little market impact.
BAILOUT SQUABBLE:
Market impatience with the pace and complications of euro decision-making has been heightened by a rush by smaller euro economies to demand collateral from Greece in return for contributing to its bailout fund, and Austria sought on Friday to resolve that dispute. The collateral demand, first made by Finland, has ruptured the common line found at the July 21 summit, particularly after Austria, the Netherlands and Slovakia said on Thursday they deserved the same treatment.
