European finance ministers started work on possible aid for Ireland’s debt-laden banks, stopping short of an immediate bailout package and risking a renewed convulsion on bond markets.
Finance chiefs from the 16-country euro region lauded Ireland’s budget cuts, echoing the rhetorical support offered in the early stages of Greece’s debt trauma before a rescue became necessary. Ireland said it doesn’t need EU money.
‘‘The Irish government in the coming days has to make a definite decision on this,’’ Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing the ministers’ meeting in Brussels late yesterday.
He said European governments can act in a ‘‘determined and coordinated way to safeguard the stability of the euro zone’’ and said ‘‘markets have to understand this decision in a proper way.’’
With Germany scolding Greece and the European Central Bank threatening to end emergency liquidity measures for banks, the public clashes over how to shake off Europe’s debt woes marked a widening of the crisis that in May forced the EU to set up a 750 billion-euro ($US1 trillion) rescue fund to keep the euro intact.
‘‘The market is not going to react very well because things are going to get worse before they get better,’’ said Sung Won Sohn, an economics professor at California State University- Channel Islands in Camarillo, California.
‘‘The European debt crisis will get worse before it gets better.’’
Ireland Resists
Ireland, reeling from a record runup in bond yields that raised concerns about the soundness of its banking system, ‘‘did not commit to enter a facility, but there are serious market disturbances,’’ Finance Minister Brian Lenihan said. European aid is ‘‘not inevitable.’’
Concern that the EU would stop short of offering a bailout pushed down Irish bonds yesterday, halting a two-day rally. The 10-year yield rose 28 basis points to 8.44 per cent, raising the extra yield over German bunds to 561 basis points. The spread, a measure of the risk of investing in Ireland, peaked at 646 basis points on November 11.
‘‘Technical’’ talks will start in Dublin with the ECB, European Commission and International Monetary Fund in an ‘‘intensification of a potential program with an accent on the restructuring of the banking sector,’’ EU Economic and Monetary Commissioner Olli Rehn said.
Such a package could come together quickly, the officials said. ‘‘Is it six months or a few days away? I’d say it’s closer to days,’’ French Finance Minister Christine Lagarde said.
Ireland’s NeedsMinisters refused to speculate about Ireland’s financial needs, estimated by Barclays Capital at about 80 billion euros. Klaus Regling, manager of the rescue facility, said the EU could raise the money in five to eight working days.
Ireland’s five-member ISEQ Financial Index of banking stocks is now worth 2 per cent of the peak valuation reached in February 2007. Officials put the cost of cleaning up the banking system as high as 50 billion euros, equal to about a third of Ireland’s economic output.
To boost confidence, Lenihan may release the 2011 budget before a planned December 7 publication date and will unveil a four- year deficit-cutting plan next week.While Ireland has maintained that it doesn’t need a bailout, Lenihan cited ‘‘a duty to sustain the stability of the euro zone.’’
Steps already taken to salvage Ireland’s banking system, which is increasingly reliant on ECB funding, will billow the deficit to 32 per cent of gross domestic product in 2010. That’s a record in the 12-year history of the euro and more than 10 times the bloc’s 3 per cent limit.
Portugal, Spain
Investors watched the EU’s handling of Ireland for clues to the fate of Portugal and Spain, two other countries forced by the EU to impose spending cuts to rein in excessive deficits.
Yesterday’s declaration echoed a February 11 show of support for Greece, which ushered in three months of politicking -- centered on Germany’s reluctance to part with taxpayer money -- before the bloc crafted a 110 billion-euro rescue formula.
Separate statements by the ministers saluted Portugal’s ‘‘appropriate measures’’ to meet deficit-cutting targets and said Greece is ‘‘broadly on track’’ with its austerity plans.
German demands triggered the latest phase in the crisis, when EU leaders on October 29 agreed to consider German Chancellor Angela Merkel’s demand for a crisis-resolution mechanism that forces bondholders to share the cost of future bailouts.
That pledge triggered 13 straight days of losses in the Irish bond market and dragged down Portuguese, Greek and Spanish securities. To stem the damage, Merkel on November 12 signed up to a five-country declaration that exempts bonds now on the market from a restructuring that could be imposed under a permanent system to be created by 2013.
Merkel Fallout
Merkel wants to penalise bondholders for betting against fiscally unsound governments after the EU’s temporary rescue fund runs out in 2013. In Paris on November 15, Greek Prime Minister George Papandreou blamed her for creating a ‘‘self-fulfilling prophecy’’ that hurt peripheral countries.
The Greek criticism drew a German rebuke yesterday. ‘‘When I heard the comments by the Greek prime minister I thought, with all due respect, that Greece has enjoyed a lot of European and German solidarity,’’ German Finance Minister Wolfgang Schaeuble said in Brussels.
‘‘But solidarity is not a one-way street. That shouldn’t be forgotten in Greece.’’
The German initiative reflected a revolt by taxpayers in richer EU countries against underwriting others at a time of 10.1 per cent euro-area unemployment. Finland’s Jyrki Katainen said that Ireland should be forced to put up collateral for any aid.
‘‘The problem isn’t Ireland per se but the fact that Germany and France have pushed for a treaty change with the option of a state default,’’ said Carsten Brzeski, an economist at ING Group NV in Brussels. ‘‘The contagion effect will remain as long as there’s no certainty about what’s going to happen beyond 2013.’’