Sarkozy to press Merkel on ECB after bond fiasco
French President Nicolas Sarkozy will press German Chancellor Angela Merkel on Thursday to let the European Central Bank act decisively to rescue the euro zone from a deepening sovereign debt crisis now hitting Germany.
French officials hope Berlin will relent in its opposition to a greater crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, highlighting how investors are now shunning even Europe's safest haven.
"There is urgency (for ECB intervention). We will talk about it today in Strasbourg," French Foreign Minister Alain Juppe said on France Inter radio, hours before the French, German and Italian leaders were due to meet in the eastern French city.
"I think and hope that the thinking will evolve and that the ECB should play an essential role to re-establish confidence," Juppe said.
Sarkozy took a step toward Merkel this week by agreeing to amend the European Union's treaty to permit intrusive powers to change national budgets in euro area countries that go off the rails. But the German leader has so far maintained her line that the treaty forbids the ECB from acting as lender of last resort to buy euro zone bonds.
With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.
In signs of public resistance to austerity in the currency area's troubled south, riot police clashed with workers at Greece's biggest power producer protesting against a new property tax, and Portuguese workers staged a one-day general strike.
Wednesday's auction, in which the German debt agency found no buyers for half of a 6 billion euro 10-year bond offering at a record low 2.0 percent interest rate, sent Bund futures down to their lowest level in nearly a month on Thursday as confidence in German debt continued to be shaken.
Bond investors are effectively on strike, interbank lending to euro area banks is freezing up, ever more banks are dependent on the ECB for funding, and depositors are withdrawing increasing amounts from southern European banks.
Investors are also unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90-billion-euro ($120-billion) rescue deal that had appeared done and dusted.
A special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances, such as a new downturn in growth or support for banks, without endangering its triple-A credit status.
Merkel, Sarkozy and new Italian Prime Minister Mario Monti were also expected to discuss the reforms planned by Italy's new government of technocrats marking Rome's return to grace in Europe after the era of scandal-plagued former Italian prime minister Silvio Berlusconi, who resigned this month.
The German bond auction pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.
"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.
Finance Minister Wolfgang Schaeuble's spokesman said the auction did not mean the government had refinancing problems and few on financial markets disagreed. Some analysts said Berlin just needed to offer a more attractive yield.
But it was a sign that, as the bloc's paymaster, Germany may face creeping pressure as the crisis continues to deepen. One senior ratings agency official said it could give Berlin cause to re-examine its refusal to embrace a broader solution.
"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions," David Beers of Standard & Poor's told a conference in Dublin.
Merkel showed no sign on Wednesday of bending to calls, most notably from France, to allow the ECB to act more decisively.
In a forceful speech to the Bundestag, the lower house of the German parliament, she warned against fiddling with the bank's strict inflation-fighting mandate. She also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them "extraordinarily inappropriate."
Merkel has said the EU treaty bars the ECB from acting as a lender of last resort and printing money to buy government debt. She rejected joint "euro bonds," dismissed a proposal to mutualise the euro zone's debt stock, and rebuffed attempts to allow the bloc's rescue fund to borrow from the ECB or the IMF.
Yet at the same time, she has declared that the only answer to the crisis was "more Europe" and won endorsement from her party to press for a fully fledged European political union based around the euro zone.
The borrowing costs of almost all euro zone states, even those previously seen as safe such as France, Austria and the Netherlands, have spiked in the last two weeks as panicky investors dumped paper no longer seen as risk-free.
"Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
The crux of an acceleration of the crisis in the past month is Italian bond yields' jump to levels around 7 percent widely seen as unbearable in the long term, despite intervention by the European Central Bank to buy limited quantities.
Bank of England policymaker David Miles said in an interview broadcast on ITV late on Wednesday there is a risk that one of the euro zone's 17 member states could leave the currency bloc.
"I don't think any of us can feel confident one way or another about whether all the countries that are currently in the euro zone will still be in it," he said.
In a Reuters poll conducted over the last 10 days, 14 out of 20 prominent academics, former policymakers and independent thinkers agreed the euro zone's make-up would change.
A new "core" euro zone with fewer members received qualified backing from 10 economists as a possible solution, with seven of them saying Greece should be excluded from it.
"The euro zone can and should survive, but it will not survive on the current trajectory," said Jeffrey Sachs, Director of the Earth Institute at Columbia University in New York.
With time running out for politicians to forge a crisis plan that is seen as credible by the markets, the European Commission presented a study on Wednesday of joint euro zone bonds as a way to stabilize debt markets.
European Commission President Jose Manuel Barroso unveiled proposals for much more intrusive oversight of euro zone countries' budgets and efforts to meet macroeconomic targets, and set out the options for introducing common euro zone bonds.
[Source: By Daniel Flynn and Stephen Brown, Reuters, Paris and Berlin, 24Nov11]
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