New Year debt pile-up puts new pressure on euro zone

BRUSSELS Mon Nov 28, 2011 12:37pm EST

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BRUSSELS (Reuters) - France and Germany are aiming to lay out plans for deeper euro zone integration by mid-December and have a formal framework in place for achieving it by the end of January, aware that intense financial market pressures will resume early in the new year.

EU officials briefed on their thinking say Paris and Berlin still want to change the EU treaty to enforce tighter budget rules in the long run, but recognize that to move as quickly as possible toward deeper fiscal integration and reassure markets, a separate agreement outside the treaty may be necessary first.

Part of the urgency is based on 2012 debt financing pressures, with several major euro zone countries having to sell or refinance large amounts of debt early next year.

With markets losing confidence in the bulk of the 17 euro zone countries, and yields in triple-A rated countries such as France, Austria, the Netherlands and Finland coming under pressure, there is a need to move quickly to shore up defenses.

Italy, the most immediate concern for EU officials, has to refinance around 150 billion euros of debt between February and April next year, and Germany and France also have substantial refinancing schedules in the first quarter of 2012. Spain also has a busy debt issuance program.

"January is a real concern," said a senior EU official directly involved in efforts to resolve the crisis. "From the markets' point of view, it's clear we will know then whether they still have confidence in euro zone sovereign bonds."

Private sector buyers of sovereign debt -- banks, insurance companies and pension funds -- generally make asset allocation decisions on a quarterly or yearly basis. Their confidence in euro zone debt after two years of crisis is rapidly ebbing and they could decide to invest in debt elsewhere.

Unless a clear and convincing plan can be set out by the end of January, EU officials say, euro zone sovereigns will find it hard to finance the 637 billion euros of debt they have falling due in 2012, nearly 40 percent of which falls in the first four months of the year, according to Barclays Capital.

Deutsche Bank chief executive Josef Ackermann, who has been at the heart of discussions on resolving the debt crisis, warned EU officials last week that failure to find a political solution by the end of December risked a dramatic deterioration, according to a source familiar with the talks.

"The longer politicians wait for a solution, the more difficult it will become to borrow," said Huw Worthington, a sovereign debt analyst with Barclays Capital. "Investors are extremely nervous."

"A VERY BAD IDEA"

German Finance Minister Wolfgang Schaeuble told Germany's ARD television on Sunday the aim was for euro zone countries to move rapidly toward a "stability union" that would involve much tighter budget rules for the currency union.

"One can do that quickly," he said. "The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that."

Such a move could lay the groundwork for the introduction of jointly issued and underwritten euro zone bonds, although German Chancellor Angela Merkel remains opposed to such an idea.

The European Commission, which last week unveiled its plans for euro area bonds, referred to them as "stability bonds", echoing Schaeuble's language.

The problem France and Germany are confronting is how much support there will be among the other 15 euro zone members to move rapidly toward some form of fiscal union, especially if it is done outside the EU treaty. [ID:nL5E7MR0VI]

Finland made clear its discomfort with the Franco-German proposal, saying it didn't like anything that sidelined the EU treaty, even if it came back to it later.

"We don't find this type of system good and I am not too sure if it will get wider support," Prime Minister Jyrki Katainen told reporters.

"The disadvantage of this proposal is that it would bypass the EU. The Commission would have a very small role."

Luxembourg Prime Minister Jean-Claude Juncker, who is also chairman of the Eurogroup countries, described the French and German thinking as a "very bad idea", even though no formal proposals are expected before an EU leaders' summit on December 9 or shortly afterwards.

"I don't think we would be best advised to look for instruments outside the treaty," he said, saying the best basis for deeper integration among the euro zone was first of all an agreement among all 27 EU countries to change the EU treaty.

"But trying to divide even the 17 member states of the euro area and having them organized in two different groupings seems to me to be a very bad idea," Juncker said.

(Reporting by Julien Toyer, John O'Donnell and Robin Emmott; Writing by Robin Emmott; editing by Luke Baker and Stephen Nisbet)

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