France, Germany Say Euro Saved; Investors Remain Skeptical
Under pressure to arrest the threat to the currency before markets opened and prevent contagion engulfing Portugal and Spain, EU finance ministers endorsed an 85 billion-euro ($113 billion) loan package on Sunday to help Dublin cover bad bank debts and bridge a huge budget deficit.
They also approved the outlines of a long-term European Stability Mechanism (ESM), based on a Franco-German proposal, that will create a permanent bailout facility and make the private sector gradually share the burden of any future default.
“This is a measure which is not simply a single shot taken in response to an important crisis, it forms part of the absolute determination of Europe — of France and Germany — to save the euro zone,” French government spokesman Francois Baroin told Europe 1 radio.
German Finance Minister Wolfgang Schaeuble said now that clarity had been achieved, “we are hoping for calming and reality in the financial markets”, where he said speculation against euro zone countries was “hardly rational”.
France’s Minister of the Economy Christine Lagarde said “irrational”, “sheep-like” markets were not pricing sovereign debt risk in Europe correctly.
The euro hovered near two-month lows against the dollar as investors looked past the Ireland rescue to the debt woes of other peripheral euro zone economies.
And the risk premium investors charge to hold Irish, Spanish and Portuguese bonds rather than safe-haven German bunds fell only slightly in early London trade.
“There are still lingering worries about the rest of the countries, including Portugal and Spain,” said Lorraine Tan, director of Asian equity research at ratings agency Standard & Poor’s. “It does raise risk worries and there are less people willing to take risk at this stage.”
Nouriel Roubini, the U.S. economist who warned of an impending credit crisis before 2007, told the Diario Economico business daily that Portugal was increasingly likely to need an international bailout.
“Like it or not, Portugal is reaching the critical point. Perhaps it could be a good idea to ask for a bailout in a preventative fashion,” he said.
Adding to the gloom, Portuguese business confidence dipped in November for the second straight month, on poor prospects for the economy due to austerity measures designed to calm investor concerns about its creditworthiness.
Troubles in Portugal, widely seen as the next euro zone “domino” at risk, could spread quickly to its neighbor Spain because of their close economic ties.
Interest rate strategists expect Spain will have to pay more to lure investors to Thursday’s offering of three-year bonds, but five-year credit default swaps on BBVA and Santander tightened on Monday after widening aggressively last week.
The new European Stability Mechanism could make private bondholders share the cost restructuring a euro zone country’s debt issued after mid-2013 on a case-by-case basis.
The lack of detail in an earlier Franco-German deal on a crisis mechanism, agreed last month, and talk of private investors having to take losses, or “haircuts”, on the value of sovereign bonds, helped drive Ireland over the cliff.
NO SILVER BULLET
Irish Prime Minister Brian Cowen, who for weeks denied Dublin needed a bailout, expressed satisfaction with the deal despite the interest rate of close to 6 percent which Ireland will have to pay on the loans.
“This agreement is necessary for our country and our people. The final agreed program represents the best available deal for Ireland,” Cowen said.
Ireland was given an extra year, until 2015, to get its budget deficit down below the EU limit of 3 percent of gross domestic product in an acknowledgment that austerity measures will hit economic growth in the next four years.
But initial reactions from market analysts to the EU moves ranged from skeptical to bleak.
“I don’t think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain,” said Peter Westaway, chief economist at brokers Nomura.
“I think it is almost impossible now to stop the contagion,” said Mark Grant, managing director of corporate syndicate and structured debt products at Southwest Securities in Florida.
International Monetary Fund procedures would apply in the ESM. The IMF’s “lending into arrears” policy stipulates that the Fund will lend to a country that is making good-faith efforts to come to an agreement with bondholders.
European Central Bank President Jean-Claude Trichet said the important points were that the IMF’s doctrine would apply, the European Union would not get involved in debt restructuring itself and existing bondholders would not be hit retroactively.
Debt worries have driven the crisis for the past year, severely denting confidence in the 12-year-old euro currency and producing what amounts to a showdown between European politicians and financial markets.
The proposed permanent crisis resolution mechanism, to be finalized in the coming weeks, is intended to prevent Europe having to rush like a fireman from one blaze to another.
But it breaks several longstanding taboos:
– it effectively tears up the “no bailout” clause in the EU treaty, to which an exception had already been made for Greece;
– it creates a permanent rescue mechanism to replace the temporary three-year facility established in May;
– it accepts for the first time the possibility of a sovereign default in the euro zone;
– and it allows for the possibility of making private bondholders share the cost with taxpayers after mid-2013.
(Additional reporting by the Dublin and Brussels bureau; writing by Andrew Roche and Paul Taylor; editing by Jon Boyle/Mike Peacock)