European governments threw debt- strapped Ireland an 85 billion-euro ($113 billion) lifeline and scaled back proposals to saddle bondholders with losses in future budget crises, seeking to reverse the market selloff menacing the euro.
European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.
The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.
Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.
“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”
Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.
Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.
The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.
Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.
“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”
Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.
Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.
German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.
Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.
“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.
A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.
Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.
Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.
Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.
““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”
The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.
While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.
Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.
“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.
Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.