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Euro zone working on crisis package, Lisbon sells debt
January 12, 2011 / 12:35 PM / 7 years ago

Euro zone working on crisis package, Lisbon sells debt

BERLIN/LISBON (Reuters) - Major euro zone states are working on a comprehensive medium-term package to solve the bloc’s debt crisis and could reach agreement in the next two months, Germany’s finance minister said on Wednesday.

<p>A woman walks past a shop in Dublin's North side November 16, 2010. REUTERS/Cathal McNaughton</p>

Wolfgang Schaeuble’s disclosure came as the European Union’s executive called for greater emergency lending power to underpin the euro zone, and Portugal, widely seen as the next candidate for a bailout, successfully sold its first debt of the year.

Schaeuble said talks on a package of measures were under way with France, Italy and the head of the International Monetary Fund. He did not say whether the package would include expanding the euro zone rescue fund.

“We have to solve the problems not only in the short-term -- when there are short-term problems -- but also in the medium-term,” Schaeuble told reporters in Berlin.

A deal would not be reached at an EU finance ministers’ meeting next week but could be sealed at one of the upcoming EU summits on February 4 and late March, he said.

European Commission President Jose Manuel Barroso called for a summit decision in February on increasing the effective lending capacity of the European Financial Stability Facility (EFSF) and making it more flexible.

“We are saying very clearly that we believe the financing capacity must be reinforced and the scope of the activities of the EFSF should be widened,” Barroso told a news conference.

Germany and France, the two biggest euro powers, insisted the 440 billion euro ($570.9 billion) backstop is sufficient.

Separately, the EU Commission suggested in a report seen by Reuters that a one-off tax could be levied on banks to raise 50 billion euros to fund the future European Stability Mechanism to support euro zone states in trouble.

Germany’s deputy finance minister, Steffen Kampeter, told Reuters the idea was ”an interesting contribution“ to the debate but Berlin had already legislated for bank taxes for 2011 ”and I don’t see a window for further action.

Banking groups voiced immediate opposition, pointing to a slew of new national levies they already face.

EU Monetary Affairs Commissioner Olli Rehn said work was in progress on raising the lending capacity of the existing rescue fund, which can effectively lend only 250 billion euros because of cash buffers set aside to obtain a top-notch credit rating.

On the markets, Portugal drew strong demand for its 10-year bonds and the yield actually fell slightly to 6.716 percent from 6.806 percent at its last auction, after European Central Bank buying of its bonds this week bought Lisbon time.


Portuguese Finance Minister Fernando Teixeira dos Santos called the auction a success, with 80 percent of the demand from overseas investors. But there was no sign that markets saw it as a turning point in the euro zone debt crisis.

While the yield was below the 7 percent level regarded as unsustainable, analysts cautioned that Portugal has a lot more debt to sell in 2011, with a potential funding crunch in April.

“All the Portuguese auction does is buy a little bit of time for the Portuguese authorities. It certainly doesn’t rule out the fear that they will have to ask for a bailout,” said Jane Foley, strategist at Rabobank.

Given traumatic memories of two IMF interventions following the 1974 revolution that overthrew Europe’s longest-running dictatorship, Socialist Portuguese Prime Minister Jose Socrates is determined to avoid applying for aid if at all possible.

“We don’t need that help. We are able to do our work ourselves,” Socrates told reporters on a visit to Frankfurt, saying the debt auction showed markets were rewarding his country’s fiscal consolidation measures.

The issue looms large in Portugal’s presidential election campaign with both of the main candidates for the January 23 ballot trying to use it to discredit the other.

Socrates, who heads a minority government dependent on opposition votes to pass legislation, insisted his country is ahead of target in reducing its deficit and does not face the acute problems that drove Greece and Ireland to seek help.

The successful Portuguese auction and optimism that a more effective EFSF may be in the works helped reduce the risk premium investors demand to hold Spanish and Italian government bonds rather than benchmark German debt.

Euro zone sources say any increase in lending capacity would be limited by the dual constraints of satisfying credit rating agencies and avoiding a new round of parliamentary approvals, particularly in Germany.

China’s deputy central bank governor, Yi Gang, said on a visit to London that Beijing is prepared to participate in any future euro zone stabilization measures and possibly invest in the EFSF, seeing the euro as a pillar of a multi-currency global financial system.

High-debt Belgium’s caretaker prime minister said his government would aim for a budget deficit of less than 4.0 percent of gross domestic product this year, compared with 4.7 percent forecast by the Belgian central bank.

“In mid-February we will take initiatives that will improve the deficit in such a way that we will exceed the targets agreed with the European Union,” Yves Leterme told a news conference.

Belgium has also come under bond market pressure due to its failure to form a new government since elections last June, prompting King Albert to ask the caretaker administration to devise new deficit-cutting measures in the meantime.

Europe’s safety net is meant to buy time to allow heavily indebted governments to restore order in their public finances to make their debt burden manageable. Many economists, however, believe Greece and Ireland will eventually have to restructure their debt, forcing losses on taxpayers and/or bond holders.

Additional reporting by Julien Toyer, Ilona Wissenbach and Philip Blenkinsop in Brussels, William James in London, Axel Bugge and Sergio Goncalves in Lisbon; writing by Paul Taylor; editing by Mike Peacock/Patrick Graham/Susan Fenton

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