European Union leaders agreed to amend the bloc’s treaties to create a permanent crisis- management mechanism in 2013, while divisions flared over steps to prevent concern over debts from engulfing Portugal and Spain.
Germany, the biggest contributor to Europe’s bailouts of Greece and Ireland, pushed through an accord to set up a system that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.
“Our task now is to hold the course, walk not talk, and prove those wrong who predicted the demise of our common currency,” European Commission President Jose Barroso told reporters after the first session of an EU summit in Brussels late yesterday. The summit is slated to end around 1 p.m. today.
Most European bond markets fell yesterday, as Germany’s refusal to boost the current 750 billion-euro ($1 trillion) emergency fund stirred concern that Europe hasn’t found the right formula for battling the debt crisis that threatens the euro.
Driven by a German public outcry against propping up fiscally reckless countries, Chancellor Angela Merkel ruled out putting more money on the table, retooling the support facility enacted after the Greece rescue to enable it to buy troubled governments’ bonds or further entwining Europe’s economies through joint bond sales.
“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”
While use of the main 440 billion-euro component of the fund to buy distressed countries’ bonds didn’t come up at the summit, Luxembourg Prime Minister Jean-Claude Juncker said it will be on the agenda soon.
“We didn’t discuss that in detail,” said Juncker, who heads the panel of euro-area finance ministers. “This will be taken under consideration in the next coming weeks.”
Such a step would ease strains on the European Central Bank, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.
Spain and Greece were in investors’ sights yesterday. A Spanish bond auction raised 2.4 billion euros, less than the target. The extra yield that investors demand to hold Spanish 10-year bonds over German counterparts rose 3 basis points to 245 basis points, a day after Moody’s Investors Service said it may cut its credit rating.
Moody’s warned it’s considering a “multi-notch” downgrade of Greece, which is rated below investment grade after dragging Europe into the sovereign debt crisis and obtaining a 110 billion-euro aid package in May. Greece’s 10-year spread slipped 2 basis points to 881 before the Moody’s announcement.
Germany and Austria also snubbed proposals by Luxembourg’s Juncker for European governments to pool some of their borrowing to create a more integrated bond market.
Joining forces to borrow could cost German taxpayers an extra 13.4 billion euros in interest payments annually by harming Germany’s credit rating, the Munich-based Ifo economic research institute said on Nov. 23.
German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in an 85 billion-euro support package for Ireland on Nov. 28.
‘Case by Case’
While costs for bondholders aren’t mentioned in the two- sentence amendment, the leaders plan to endorse a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.
ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”
Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.
The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.
“We said that we stand by the euro overall and that’s why I think it was a good day for Europe,” Merkel said.
Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, would need to ratify the amendment.
Britain, the largest of the non-euro states and with a soaring deficit of its own, will back a future aid facility as long as it doesn’t have to pay in, Prime Minister David Cameron said.
“We do need a new mechanism to help the euro zone sort out its problems and its issues — that’s important for Britain,” Cameron said in Brussels. “But we do need to make sure that Britain is not liable to spend money under that mechanism.”
Bowing to U.K. demands, the leaders agreed that the 60 billion-euro portion of the package financed by the EU’s central budget will be phased out when the new fund, solely backed by euro countries, is set up in 2013.