EU Preps US$645 Billion Fund to Fight ‘Wolfpack,’ Debt Crisis
James G. Neuger and Meera Louis
Bloomberg
Brussels, Belgium
Monday, 10 May 2010, 12.06 am CET
European Union finance ministers moved toward agreement on an unprecedented loan package worth at least US$645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis and shattering confidence in the euro.
Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, the 16 euro governments sketched out plans to make €440 billion (US$570 billion) available, with 60 billion euros more from the EU’s budget, according to 3 officials at the talks in Brussels. An additional, unspecified sum may come from the International Monetary Fund, the officials said.
“We are going to defend the euro,” Spanish Economy Minister Elena Salgado told reporters as she arrived to chair the meeting yesterday. “We think we have a duty for more stability for our currency. We will do whatever is necessary.”
Europe’s failure to contain Greece’s fiscal crisis triggered a 4.1% drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted the U.S. and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession.
‘Wolfpack Behavior’
President Barack Obama spoke by phone with German Chancellor Angela Merkel for the second time in three days, adding to the international pressure Europe has faced since a hurriedly arranged conference call of Group of Seven finance chiefs on May 7. Obama yesterday emphasized “the importance of the members of the European Union taking resolute steps to build confidence in the markets,” White House spokesman Bill Burton told reporters in Hampton, Virginia.
“In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.”
Expectations of decisive action buoyed the euro as trading began in Asia. It jumped 1.5% to $1.2939 as of 7:59 a.m. in Sydney. EU officials aimed to wrap up the meeting by 2 a.m. Brussels time.
Several Alternatives
Germany, the bloc’s largest economy, is being represented by Interior Minister Thomas de Maiziere after wheelchair-bound Finance Minister Wolfgang Schaeuble, 67, was rushed to a Brussels hospital due to an adverse reaction to new medication.
The officials didn’t say what additional measures the European Central Bank may take.
“Europe is getting its act together,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.”
Government officials said they won’t push the independent ECB to, for example, buy government bonds. President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. Trichet is in Basel, Switzerland, for a scheduled meeting of central bankers from the Group of 10 nations. Vice President Lucas Papademos is attending the Brussels talks.
With the euro facing the stiffest test since its debut in 1999, the weekend turned into a crisis-management exercise to restore faith in the currency and prevent a European debt crisis from cascading around the world.
Stability
The purpose is to “decide on a mechanism that enables us to assure the stability of the euro, stability in the zone and, beyond that, stability in financial markets,” French Finance Minister Christine Lagarde said.
The euro slid to $1.2715 from $1.3293 last week and is down 15% since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8% to 237.18.
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.
Britain, the EU’s third-largest economy, won’t contribute to a fund to shore up euro countries, though it backs efforts to restore stability, Chancellor of the Exchequer Alistair Darling said.
Euro Support
“When it comes to supporting the euro, that is for the eurogroup countries,” Darling told Sky News. “We need to show again today that by acting together we can stabilize the situation.”
Germany stepped up calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.
The vow to push budget shortfalls below the euro’s 3% limit echoes promises that have been regularly broken ever since governments in 1999 set a 3-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6% of gross domestic product in 2010 and 6.1% in 2011.
Plans for a European credit-rating authority are already under consideration at the European Commission, the bloc’s Brussels-based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.
Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, European Commission President Jose Barroso said “some of the points you have mentioned will be contemplated.”
The political leadership of the US$12 trillion economy also signed off this weekend on a €110 billion aid package for Greece negotiated by finance ministers last week. So far 9 governments have cleared the way for funds to be sent to Athens.
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