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Europe

Merkel seeks to calm euro breakup fears as markets lose faith

Video by Carla WESTERHEIDE

Text by News Wires

Latest update : 2010-11-25

Chancellor Angela Merkel told weary investors on Thursday that Germany considered the euro zone to be more stable today than one year ago, echoing other leaders' assurances that euro countries stood together and the common currency would not fail.

REUTERS - Euro zone leaders dismissed any risk of the single currency area breaking up after financial markets, alarmed by Ireland’s debt crisis, forced the borrowing costs of Portugal and Spain to record highs.

German Chancellor Angela Merkel, seeking to sooth markets alarmed by her comment this week that the euro was in an “exceptionally serious” situation, saying on Thursday she was confident the euro area would emerge stronger from the crisis.

Europe was now showing “more solidarity than a year ago”, she told a conference in Berlin.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said in a newspaper interview he was not worried about the survival of the euro but he was concerned that “in Germany, the federal and local authorities are slowly losing sight of the common European good”.

Merkel tried to reassure nervous investors that private bond holders would not be made to share with taxpayers the cost of any sovereign default in the euro area until after 2013. German proposals for so-called “haircuts” for bond holders have spooked markets and raised peripheral euro zone states’ borrowing costs.

Asked if the euro zone could break apart, Klaus Regling, chief of the euro’s financial safety net, European Financial Stability Facility (EFSF), told German daily Bild: “There is zero danger. It is inconceivable that the euro fails.”

Some economists and commentators, mostly in Britain and the United States, have suggested the 16-nation common currency launched in 1999 could split because of peripheral members’ high debts and deficits, and a loss of competitiveness with Germany.

But Regling said: “No country will give up the euro of its own will: for weaker countries that would be economic suicide, likewise for the stronger countries. And politically, Europe would only have half the value without the euro.”

Greece received a three-year 110-billion-euro EU/IMF bailout in May, leading to the creation of the EFSF, which Ireland has now applied to tap to cope with the devastating impact of a banking crisis on its public finances.

“More than enough”

The Irish government said it was confident it would be able to pass the toughest budget in the country’s history next month to meet the terms of an EU/IMF rescue under negotiation. Some EU sources suggested a deal could be clinched at the weekend, but a European Commission spokesman said he expected talks to be concluded at the end of the month or in early December.

The cost of insuring Irish debt against default continued to rise on Thursday amid market doubts about Dublin’s austerity plan. In another sign of waning confidence, European clearing house LCH.Clearnet increased the deposit it requires traders in Irish government bonds to post for the third time this month.

German Bundesbank chief Axel Weber, a powerful member of the European Central Bank’s governing council, said he was convinced EU leaders would do whatever it takes to repel what he called an “opportunistic attack” on the currency area.

Weber noted that the EFSF and other EU rescue funds had enough money, if necessary, to cover the borrowing needs of the four financially troubled members of the euro zone—Greece, Ireland, Portugal and Spain.

“If that is not enough, I am convinced euro zone states will do what is necessary to protect the euro,” Weber told French business and political leaders in Paris. “But 750 billion (euros) should be more than enough to see off an attack on the euro zone.”

However, the German government and the European Commission denied a report by the newspaper Die Welt that Brussels had proposed doubling the emergency rescue fund because it was not big enough to cope with bailing out Spain if needed.

Euro zone policymakers are hoping that Spain and Portugal can stave off an Irish- or Greek-style debt meltdown.

A Reuters poll this week showed 34 out of 50 analysts surveyed believe Portugal will be forced to follow Ireland and ask for help. In a separate survey only four out of 50 economists thought Spain would seek external aid.

“Of course the situation is serious,” Regling said when asked about Merkel’s comments. But he said there was no way France and Italy were in danger.

“Italy has come through the crisis well and has its state deficit in hand. And France has the same credit standing as Germany,” he added.

To help a euro zone country, the EFSF would issue bonds on the market which would be backed by up to 440 billion euros ($585.9 billion) worth of guarantees from euro zone governments.

Ireland’s government faced the first electoral backlash from an unprecedented austerity package that will cut wages and welfare benefits and raise taxes when voters cast ballots in a by-election in the northwestern county of Donegal on Thursday.

Prime Minister Brian Cowen’s four-year plan for tackling the worst budget deficit in Europe failed to impress investors or calm fears that Ireland’s woes may tip other euro zone nations into crisis.

The 15 billion euros ($20 billion) in spending cuts and tax increases unveiled on Wednesday will form the basis for an IMF/EU rescue package worth about 85 billion euros.

With Cowen’s coalition imploding amid public fury at having to go cap in hand to the IMF and the EU, the Donegal vote raises the risk that the 2011 budget, the first step in the four-year plan, may not make it through parliament on Dec. 7.

Failure to get next year’s budget passed would turbo-charge the crisis in Ireland and Europe and analysts have said the main opposition parties may abstain from voting to allow the budget through if it looks like Cowen cannot get the numbers.

Aside from political uncertainty surrounding the 2011 plan, investors are sceptical the fiscal targets can be met. Ratings agency Standard & Poor’s dismissed the 2.75 percent annual growth assumptions underlying the strategy as too optimistic.

Date created : 2010-11-25

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