Angela Merkel: Euro Will Survive Debt Crisis
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BERLIN — The 16-nation euro currency will survive the debt crisis, German Chancellor Angela Merkel vowed Thursday, and a senior central banker said the European Union would be willing to increase its ?750 billion ($1 trillion) bailout fund if necessary.
Merkel and French President Nicolas Sarkozy also called for a swift conclusion of the negotiations for an Irish bailout.
Axel Weber, the head of Germany's central bank and a leading rate-setter at the European Central Bank, said Thursday that European nations would be willing to boost the emergency fund by as much as ?100 billion ($133 billion) to fully cover the total public debt load of Greece, Ireland, Portugal and Spain.
But when Merkel and Sarkozy discussed the eurozone's troubles on the phone Thursday evening they said the ?750 billion emergency fund for the euro would remain unchanged until it expires in 2013, German government spokesman Steffen Seibert said in a statement.
The leaders of Germany and France, the eurozone's twin economic engines, said their governments are working "under high pressure on a joint proposal for a crisis mechanism that is to replace the current one beyond 2013," the statement said.
Merkel and Sarkozy were impressed by the austerity budget presented by the Irish government, adding they agreed that the negotiations involving the Irish government, the EU and the International Monetary Fund "should swiftly be brought to a conclusion," Seibert said.
Amid the ongoing sovereign debt crisis in the eurozone, the 16-nation currency wallowed near two-month lows against the dollar Thursday, trading at $1.3364 – down from a recent high of $1.4244 on Nov. 4. Some analysts predicted it would drop further as other heavily indebted countries, like Portugal and Spain, risk following Greece and Ireland in needing massive bailouts.
But Merkel said the euro currency will survive the debt crisis.
"I'm more confident than this spring that the European Union will emerge strengthened from the current challenges," she told business leaders in Berlin, referring to May's ?110 billion ($146 billion) bailout of Greece by the EU and the International Monetary Fund.
She said the crisis has strengthened the eurozone, leading EU leaders to agree on new rules for a tougher growth and stability pact, and bringing into operation the ?750 billion ($1 trillion) emergency fund.
"We now have a mechanism of collective solidarity for the euro," she said. "And we all are ready, including Germany, to say that we now need a permanent crisis mechanism to protect the euro," Merkel added.
Experts say that while rescuing Greece, Ireland or even Portugal is manageable for the EU's emergency fund, bailing out Spain – whose economy is five times larger than any of the other three countries – would test its limits and threaten the euro's existence.
The debt loads of Greece, Ireland, Portugal and Spain total a little more than ?1 trillion, and Weber said about ?925 billion are already guaranteed – adding up the ?110 billion Greek loan package, the ?750 billion fund and the government bonds bought by the ECB – leaving only a gap of about ?100 billion.
"It's not the euro that is in danger, it's the fiscal policy in some member states that got out of hand," Weber said. "The euro is one of the world's most stable currencies."
However, a spokesman for the EU's Monetary Affairs Commissioner Olli Rehn said there were no discussions to boost Europe's emergency fund. "The financial backstops are in place and they are well and substantially funded," said Amadeu Altafaj Tardio.
In the markets, investors continued to put pressure on Portugal and Spain, keeping their borrowing costs near euro-record highs. That reflects market uncertainty about their ability to pay off debts amid an economic downturn – and fears that they will also need massive bailouts. Markets demand a higher return on bonds issued by countries seen as a risky investment.
"Uncertainty has got a firm grip on the market, that much is clear," said Filipe Silva, a debt manager at Portugal's Banco Carregosa. "Comments by (European leaders) aren't giving the market any sense of direction."
Silva said there was a clear trend toward pulling investments out of the eurozone's weaker economies.
The head of the EU's bailout fund, Klaus Regling, also defended the integrity of the eurozone.
"No country will voluntarily give up the euro – for weaker countries that would be economic suicide, likewise for the stronger countries," Regling said in Germany's Bild newspaper Thursday.
The rise in yields threatens to cause trading losses at foreign banks and pension funds that hold Portuguese and Spanish debt, because the value of bond holdings falls as the yields rise.
French banks are the most exposed to both countries' debt, with German and Spanish banks also holding sizable amounts. However, analysts say these banks have enough capital buffers to withstand a drop in the value of their bond holdings, as they did when Greece's debt markets plummeted earlier this year.
In Ireland, banking stocks continued to drop amid mounting expectations that they will be fully nationalized during the country's impending bailout.
Merkel insisted again Thursday on setting up new rules to deal with sovereign debt problems that would come into effect after 2013. She stressed, however, that no eurozone member at the moment requires debt restructuring.
Analysts and politicians have blamed Germany's insistence on making investors share the pain of bailouts for the recent rise in interest rates on Irish, Portuguese and Spanish bonds. EU finance ministers have said the new mechanism would only apply to bonds issued after 2013 but that has failed to abate market tensions.
Weber, head of Germany's Bundesbank, said the markets' nervousness was due to the fact that the plan was announced but details left unclear. He added a transparent solution for a permanent crisis mechanism should now be found as fast as possible to calm the markets.
"We need a crisis mechanism that we don't have to improvise each time during a crisis," Weber said. He also backed chancellor Merkel's stance that private creditors should in the future also share a part of the burden.
The new crisis mechanism is supposed to replace the ?750 billion financial backstop set up by eurozone governments and the IMF in May, after intervention to save Greece.
The EU's executive commission will release its plan for the new bailout rules in early December.
Earlier in the day, France and Germany's foreign ministers said their nations would be able to provide swift assistance for Ireland, which is negotiating an estimated ?85 billion ($115 billion) EU-IMF bailout.
But French Foreign Minister Michele Alliot-Marie said Europe is facing a "speculative attack" against the euro "in which those countries that could appear weak in the eyes of speculators are put under pressure."
Alliot-Marie underlined the importance of intervening quickly in markets to prevent further destabilization and supported Merkel's call to set up the new bailout mechanism.
"Now we want to reinforce these regulations to have a crisis mechanism that allows us not only to react, but to prevent these speculative attacks," Alliot-Marie said.
To get the bailout, Ireland on Wednesday unveiled a plan to cut ?15 billion ($20 billion) from its deficits through 2014. Opposition leaders in Dublin, however, vowed Thursday to rewrite Ireland's harsh four-year austerity plan if, as expected, they oust Prime Minister Brian Cowen in early elections next year.
Ireland's deficit this year is forecast to reach 32 percent of GDP, a modern European record, fueled by the billions it has spent bailing out Irish banks who gorged themselves on overpriced real estate.
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Gabriele Steinhauser in Brussels, Barry Hatton in Lisbon, and David Stringer and Shawn Pogatchnik in Dublin contributed to this report.
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JUERGEN BAETZ and MELISSA EDDY 11/25/10 07:21 PM ET Associated Press