Contradictory statements made by eurozone politicians to domestic audiences have underlined the fragility of last week’s deal to rescue Greece and unsettled financial markets already on edge due to the US debt impasse.
Greek Prime Minister George Papandreou told lawmakers from his PASOK socialist party on Wednesday that debt-stricken Athens will effectively receive the first joint eurobonds in the form of loans at close to cost price from the euro zone’s rescue fund.
“The decision of our European partners to lend us at 3.5%, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet,” he said.
His comments may inflame critics of eurozone bailouts in Germany and other Northern European countries, who vehemently oppose any mutualisation of fiscal risk in the 17-nation single currency area. The remarks may also irk Spain and Italy, indebted economies that are paying high yields on their bonds.
Germany, which previously insisted on charging an interest rate premium on ‘deficit sinners’ to deter moral hazard, relented at last week’s summit and accepted that the high borrowing rate was counter-productive for countries mired in recession.
But common eurozone bonds remain anathema in Berlin, where fiscal conservatives are warning against the euro zone becoming a “transfer union” in which hard-working German taxpayers’ money would be poured into a bottomless pit.
German Finance Minister Wolfgang Schäuble sought to assuage critics in the ruling coalition, assuring lawmakers that the summit did not give the eurozone rescue fund “carte blanche” to buy bonds of states in difficulty.
“Even in the future, such purchases should only take place under very strict conditions when the European Central Bank deems there are exceptional circumstances on the financial markets and dangers for financial stability,” Schäuble said in a letter dated 26 July, obtained by Reuters on Wednesday.
“The government rejects a ‘carte blanche’ for widespread purchases on the secondary market.”
Common debt management?
Schäuble said one summit would not be enough to solve the euro zone’s problems but the agreed measures could prevent Greece’s debt woes from becoming “a crisis that would endanger the euro zone as a whole, and therefore the euro”.
His comments pointed to obstacles to intervention by the European Financial Stability Facility (EFSF), which may limit its ability to prevent contagion to bigger economies such as Spain and Italy.
The summit agreed to allow the EFSF to give precautionary credit lines to states at risk of being shut out of credit markets, to lend governments money to recapitalise banks and to buy bonds on the secondary market in exceptional circumstances.
In contrast to Schäuble, Papandreou highlighted the extent to which those moves put the euro zone on the road to joint debt management.
“The bond buybacks in the secondary market are something we sought for a long time to be able to intervene against the appetites of markets and speculation,” he told legislators.
“This will be done through the EFSF, which means that in an embryonic form, a truly common debt management practice is beginning in the euro zone,” the Greek leader said.
Last week’s political deal has yet to be put into legal form and approved by national parliaments in the euro area – a process that will take at least until late September and could spark revolts in Germany, the Netherlands, Finland or Slovakia.
In the meantime, the EFSF has no immediate power to intervene in case of a run on Spanish or Italian debt of the kind that began earlier this month, EU officials say.
The cost of insuring Italian and Spanish government debt against default rose after Schäuble’s comments and yields on most eurozone peripheral sovereign bonds were back around the levels before last week’s emergency summit, partly due to growing jitters about the US debt crisis.
Shares in leading Italian banks Intesa Sanpaolo and Unicredit fell sharply as the yield premium on Italian government bonds over benchmark German Bunds widened.
“The lack of clarity on the new role of the EFSF and the execution risk involved with the EU plan are weighing on the market,” said Gavan Nolan, an analyst at credit default swap data provider Markit.
In addition, traders said uncertainty over the US debt ceiling debate nearing a 2 August deadline was fuelling risk aversion that is hurting the eurozone periphery.
Negotiations between Democrats and Republicans to raise the US borrowing limit and agree a multi-year deficit reduction plan are deadlocked over the Republicans’ refusal to accept any tax increases.
EU officials say the lack of “verbal discipline” among eurozone policymakers, and the need for governments to reassure divergent domestic audiences, has created a permanent cacophony that has aggravated the eurozone crisis.
“Last summer, the crisis cooled partly because eurozone politicians went to the beaches and stopped contradicting each other in public every day,” one senior EU official involved in the Greek rescue negotiations said.
“That moment can’t come soon enough this year.”