European Union leaders met behind closed doors Thursday to discuss ways to shore up the euro as market fears have flared over a fresh debt crisis threatening Portugal and Spain.
AFP - Europe moved Thursday to shore up the euro despite divisions over how to bury market fears of a fresh debt crisis engulfing Portugal and Spain.
European Union leaders met behind closed doors to lay the foundation for a permanent financial rescue system from January 2013 to protect the eurozone -- a new milestone in the evolution of the 27-nation EU.
"We all share the same objective: to ensure a stable Europe and currency," German Chancellor Angela Merkel said, calling the future euro crisis umbrella a "big piece of solidarity between the states that share the euro."
Greek Prime Minister George Papandreou, whose government was forced to implement deeply unpopular austerity measures in return for a 110-billion-euro bailout in May, said all of Europe had to act together.
"The challenge today is not what we as member states or nations are doing to shore up our (individual) economy, the challenge is a collective one now," he said.
As the summit was getting underway Moody's Investors Service warned that it could further downgrade its rating on Greek sovereign bonds because of doubts over the country's capacity to reduce its debt to sustainable levels.
Moody's took similar action against Spain, another financially vulnerable eurozone country, on Wednesday.
The outcome of the summit here is keenly awaited on financial markets that have been in a state of high uncertainty and nervousness for months, driving Ireland to follow Greece into rescues by the European Union and the International Monetary Fund.
Under-pressure Portugal and Spain are to provide details of national economic reforms after leaders agreed at their last gathering in October to tighten budgetary discipline.
EU leaders though are divided on calls to boost the coffers of a temporary rescue fund and to create joint eurozone bonds to help governments of weaker economies borrow money at lower interest rates.
Overall backstop emergency resources currently total 750 billion euros (about a trillion dollars) when IMF and non-euro EU contributions are added to the eurozone's 440-billion-euro fund.
But in a clear warning that political solidarity needs to be anchored in hard cash, the European Central Bank said shortly before the summit opened that it will almost double its reserves.
The ECB has bought 72 billion euros of government bonds to contain gaps in yields between Germany and financially struggling eurozone states since May and is urging governments to beef up the EFSF.
"With today's capital increase, the ECB sends a clear message to the summit of European leaders: the bond purchase programme is not risk-free," said ING bank analyst Carsten Brzeski.
Some countries such as Belgium want the future fund at least to be substantially bigger. "We need to prove that we have deep pockets," said Belgian Finance Minister Didier Reynders.
But led by Merkel, the EU has so far resisted pressure to pump in extra money.
A rump of hardline countries say there is no urgency to boost the EFSF as it has barely been touched so far.
Germany insists that the permanent fund should only be activated as a last resort after all other means have been exhausted.
There is also tension over whether unanimity is required to release future financial assistance -- with some nations eager to avoid granting Berlin an absolute veto.
To create the fund, EU leaders will agree small changes to the year-old Lisbon Treaty, the bloc's rule-book, in order to avoid going through the referendum route that dealt the bloc major defeats in the past.
The warnings this week by major credit rating agencies that they could downgrade the debt of Spain, Greece and Belgium showed that the single currency area -- to expand to 17 nations when Estonia joins on January 1 -- has yet to bring the curtain down on the debt drama that began in Greece.
Luxembourg Prime Minister Jean-Claude Juncker, who heads eurozone finance ministers, wants partners to consider introducing joint eurozone bonds to help weak countries struggling with high interest rates.
Portuguese Prime Minister Jose Socrates, whose country has seen its borrowing costs soar over fears about its debt load, said eurozone bonds were a "good idea" that he has "defended for a long time."
But hardliners led by Germany remain opposed, warning that it would discourage countries from making the sacrifices needed to restore market confidence.
Date created : 2010-12-16