May 11, 2010 / 4:30 AM / 9 years ago

Germany backs euro package as market rally fades

BERLIN/VIENNA (Reuters) - Germany’s cabinet on Tuesday approved the biggest national contribution to a $1 trillion emergency package intended to stabilize the euro, as global markets sobered up after Monday’s euphoric rally.

German Chancellor Angela Merkel arrives for the weekly cabinet meeting in Berlin, May 11, 2010. REUTERS/Tobias Schwarz

Relief at the European Union’s bold move to restore investor confidence gave way Tuesday to doubts whether weaker euro zone economies can meet their part of the bargain and deliver drastic budget cuts, driving the euro and stocks lower.

The 16-nation single currency, which surged to nearly $1.31 Monday, fell below $1.27 on Tuesday, as traders wondered whether the bailout package will do little more than buy European countries time to deal with their fiscal deficits.

The decision by the European Central Bank to start buying euro zone government bonds was also seen as potentially compromising the central bank’s independence.

The emergency plan, the biggest since Group of 20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008, wowed markets with its sheer size and sparked a spectacular rally in world stocks and the euro on Monday.

“The intention is to get again control of the unorderly markets, and I think this is a goal that has been achieved remarkably in an effective way,” ECB governing council member Ewald Nowotny of Austria told Reuters Insider television.

But he said the main task of stabilising the euro currency remained with member states. His ECB colleague from the Netherlands, Nout Wellink, said the debt problems must be solved because the safety net had only “a temporary nature.”

Stock and bond markets turned cautious in Asia, Europe and the United States on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area. The FTSEurofirst 300 index of leading European stocks ended down 0.4 percent after gaining 7.0 percent Monday.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Portugal and Spain, next in the market firing line after Greece, must take more deficit cutting measures this year and next.

He also raised pressure on Italy, which has the euro zone’s highest debt after Greece as a proportion of national output, and France, with a heavy structural budget deficit, to do more to improve their public finances quickly.

Wasting no time after being accused of procrastinating for months, German Chancellor Angela Merkel secured cabinet backing for Berlin’s 123 billion euro share in loan guarantees, which a government source said could be exceeded by up to 20 percent if parliament’s budget committee approves. An official spokesman said the plan could clear parliament by June 4.

“EUROPE’S FOOLS”

Conservative newspapers and the Social Democratic opposition articulated public anger and fear over the latest bailout, warning that Berlin could not trust its euro zone partners and may end up having to foot the entire bill.

“What happens if other countries that get aid from the package drop out? Will the German share increase then?” SPD parliamentary whip Thomas Oppermann asked on ARD television.

The mass-circulation Bild daily complained in a front-page headline: “We are Europe’s fools again.”

The conservative daily Die Welt said the fundamental problem was that the other euro zone countries did not share Germany’s culture of financial stability.

“The euro zone is dominated by countries for whom currency stability is not so important,” commentator Joerg Eigendorf wrote. “Nothing symbolises that more strongly than the loss of the central bank’s independence.”

Greek government officials said Athens would submit a formal request for its first tranche of euro zone/IMF aid Tuesday, seeking 14.5 billion euros in three-year loans ahead of a May 19 repayment deadline for a 8.5 billion euro bond.

In a sobering note, the International Monetary Fund said that, even though Greece’s public debt was sustainable over the medium term, the country whose debt woes spurred the unprecedented euro zone action faced plenty of risks.

Federal Reserve Chairman Ben Bernanke on Tuesday briefed U.S. senators on the move by the Fed to reopen U.S. dollar swap lines with other central banks as part of the euro zone bailout plan.

After the briefing, Senator Richard Shelby said Bernanke had told senators that the Greek debt crisis was a European problem but one that could have hurt U.S. banks if left unattended.

Many economists doubt that Greece will be able to implement its full austerity program due to social unrest, and believe it will have to restructure its debt, despite vehement denials.

A group of 160 mostly European economists, led by Philip Arestis of Cambridge and Gustav Horn of Germany’s IMK research institute, said the rescue package would only work if accompanied by growth measures including wage rises in Germany.

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PROBLEMS POSTPONED

Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities, said that “even though one of the worst scenarios, a Greek default, has been avoided for now, in many ways solving the bigger problems has simply been postponed, and new issues could emerge in places such as Portugal and Spain.”

U.S. Treasury bonds, a traditional safe haven, stabilised on Tuesday after Monday’s plunge as safe-haven bets were unwound. But gold rose to an all-time high at $1,233.05, reflecting worries that the global financial crisis of 2008 may have entered a new phase as the banking systems debts have merely been transferred to government balance sheets.

With many nations saddled with record deficits after pumping trillions of dollars into their economies during the global crisis, officials from Washington to Beijing applauded Europe’s efforts to keep the crisis contained within its bounds.

Additional reporting by Rika Otsuka in Tokyo, George Matlock, Jan Harvey, Jo Winterbottom and Neal Armstrong in London, Andreas Rinke, Sarah Marsh, Madeline Chambers and Christopher Lawton in Berlin, Mark Felsenthal in Washington; Writing by Paul Taylor; Editing by Kevin Liffey

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