Berlin’s DIW institute, one of Chancellor Angela Merkel’s five official advisers, said attempts to boost the €440bn (£384bn) EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up southern Europe would be “poisonous” for France’s credit worthiness. Dr Ansgar Belke, the group’s research chief, said the leverage proposal emerging as part of the EU’s “Grand Plan” to restore confidence is self-defeating. “It counteracts efforts made so far to stabilise the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told newspaper Handelsblatt. Berlin yesterday played down hopes of a major breakthrough as EU leaders rush to complete their plan before a deadline next week. Mrs Merkel’s spokesman said “dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled”. European stock markets slid as traders took profits on the October rally, digesting Chinese data showing a sharp fall in new loans. Germany’s DAX fell 1.8pc, Italy’s MIB was off 2.3pc and the FTSE 100 eased 0.5pc. Wolfgang Schäuble, Germany’s finance minister, said there would be no “definitive solution” but expected a deal to use an enhanced EFSF in “the most efficient way”. It is unclear whether such plans breach last month’s ruling by Germany’s top court, which said the Bundestag may not transfer “fiscal responsibilities” to EU bodies or take on “incalculable” liabilities beyond German control. Any change would need a new constitution and a popular vote.
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Tuesday, October 18, 2011
Berlin’s DIW institute, one of Chancellor Angela Merkel’s five official advisers, said attempts to boost the €440bn (£384bn) EFSF bail-out fund – possibly to €2 trillion – with guarantees to shore up southern Europe would be “poisonous” for France’s credit worthiness. Dr Ansgar Belke, the group’s research chief, said the leverage proposal emerging as part of the EU’s “Grand Plan” to restore confidence is self-defeating. “It counteracts efforts made so far to stabilise the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told newspaper Handelsblatt. Berlin yesterday played down hopes of a major breakthrough as EU leaders rush to complete their plan before a deadline next week. Mrs Merkel’s spokesman said “dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled”. European stock markets slid as traders took profits on the October rally, digesting Chinese data showing a sharp fall in new loans. Germany’s DAX fell 1.8pc, Italy’s MIB was off 2.3pc and the FTSE 100 eased 0.5pc. Wolfgang Schäuble, Germany’s finance minister, said there would be no “definitive solution” but expected a deal to use an enhanced EFSF in “the most efficient way”. It is unclear whether such plans breach last month’s ruling by Germany’s top court, which said the Bundestag may not transfer “fiscal responsibilities” to EU bodies or take on “incalculable” liabilities beyond German control. Any change would need a new constitution and a popular vote.
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Moody's, the ratings agency, issued a warning to France last night that it could face the loss of its coveted status as one of the world's most creditworthy nations after saying the euro debt crisis and slowing world economy left the country's AAA rating under pressure.
It said that while the French economy remained able to absorb normal shocks, "the government's financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis."
The warning will come as a shock to many in France and is likely to unnerve markets already anxious at the prospect of the euro debt crisis spreading to the US and Asia.
Germany's finance minister, Wolfgang Schäuble, added to the uncertainty earlier in the day when he said detailed talks to solve the crisis were likely to go beyond a self-imposed deadline set for this weekend.
He also hinted that a rescue deal will fall short of the "big bazooka" that markets believe is needed to prevent the currency club breaking up.
Schäuble said a final package would not be in place until the G20 world leaders' summit in Cannes next month. His comments dismayed investors concerned that Berlin and Paris have failed to grasp the magnitude of the eurozone's debt crisis.
Stock markets in London, Paris and Frankfurt fell, while in New York the Dow Jones industrial average plummeted 247 points by the close of trading. A two-month flight of cash from European banks accelerated, according to analysts, while fears grew earlier that ratings agencies were poised to downgrade French sovereign bonds, increasing the difference between France's borrowing costs and those of Germany to the highest level since 1995.
Oil prices, which had steadied after recent falls, turned downwards again and the euro fell against the dollar as investors sought safe havens.
David Jones, chief market strategist at IG Index, said: "German officials clearly decided that a degree of expectation management was needed, and a statement was made warning that if anyone expected a package to be in place by next Monday then they were setting themselves up for disappointment."
Markets were at fever pitch after the French president, Nicolas Sarkozy, and German chancellor, Angela Merkel, said at the weekend that they would reveal a rescue plan this Sunday at a crucial European council meeting.
The US treasury secretary, Tim Geithner, warned at the weekend it was crucial to agree a package of measures that would reassure markets and end 18 months of wrangling over how to deal with Greek debts.
EU policymakers are due to meet this weekend in Brussels ahead of the G20 conference in Cannes on 4 November hosted by Sarkozy. The chancellor, George Osborne, said the Cannes meeting would be crucial in determining whether the global economy could maintain growth. "The biggest boost to growth across the world – and for Britain – would be a resolution to the crisis in the eurozone. Maintaining the momentum towards that will be the focus of my discussion with my international counterparts."
Britain has ruled out participating directly in funding any scheme, though it is likely to become involved in a broader backstop plan put forward by the International Monetary Fund.
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