EU Fragmented Before Summit

By: Emma Pinnock in Forex Consultant on Dec. 16, 2010

Recent developments by Moody’s Credit Rating Service have created alarm in the euro zone that will likely be the topic of conversation at the European Union Summit over the next two days.  Belgium is the latest country to suffer a credit rating paring at the hands of Moody’s, but the travails of Spain and Portugal present immediate and substantial problems.

Hardly a unified front, there exists deep differences between EU members on how to proceed.  With rioting in the streets of Greece and discord in Ireland’s parliament, tempers are running short throughout the zone. 

The two largest euro zone economies, France and Germany, are taking a “wait and see” approach to the debt crisis.  German Chancellor Angela Merkel has been especially critical of the European Union’s push to raise more money to fund the EU/IMF joint loan facility.

Merkel and EU Chairman, Jean-Claude Juncker, have clashed publicly over the concept of issuing euro zone bonds.  Merkel suggested that her talks with Juncker had ruled out the possibility but analysts suspect Junker may raise the issue in the upcoming, year-end summit.

Meanwhile, Junker issued a warning to Spain and Portugal saying, “They would do well… to present structural reforms to be introduced beyond the plans of consolidation already announced.”  Both Spain and Portugal have been subject to increased pressure in bond markets.

Spain and Portugal  

The yields on Spanish 10-year bonds rose sharply on Wednesday.  The euro fell against the dollar as European equities also turned down.

Portugal announced intentions to cut through the red tape and enable economic growth.  The country also will adopt quarterly fiscal goals to go along with its planned austerity cuts.

On Wednesday, Portugal sold 500 million euros of three-month treasury bills at a punitive rate of 3.4 percent.  Last month the rate for the same volume was 1.8 percent.

Cash strapped Spain has 275 billion euros of sovereign debt and bank debt due to expire in 2011.  The country has vowed to implement huge spending cuts that will virtually affect every aspect of the country. 

The Moody’s warning to Spain specifically mentioned the high cost of debt servicing and the state of the national and regional banks as the basis for a possible downgrade, which seems imminent.  Moody’s fell short of suggesting that a EU bailout was necessary.

Arnaud Poutier, deputy head of IG Markets France, issued the following summary, “Europe remains very fragile.  Everyone sees a major crisis in the first few months of 2011 that would coincide with Spain’s refinancing operations.”

Ireland

Ireland’s beleaguered Prime Minister Brian Cowan gained support in Parliament for the 85 billion euro bailout from the IMF/EU fund.  The first disbursement is expected early next week.

Approval of the bailout and the strict austerity cuts imposed on the country have created waves of opposition.  Cowan is expected to be voted out of office in early elections next year. 

The opposition has said there is no moral or legal obligation to honor Irish bank obligations to shareholders.  The opposition party has said they will attempt to renegotiate the IMF/EU loans.

EU Discord

On Tuesday, Standard and Poor’s lowered the rating of Belgium’s sovereign debt.  The credit agency warned of another downgrade in six months.  Not surprisingly, Belgium Prime Minister, Didier Reynders, pointed to a doubling of the EU’s 440 billion euro portion of the loan facility.

Most of the euro zone members do not expect any decision at this time.  Merkel has said that only 10 percent of the fund has been used to date and that an increase in the member contributions would lead to unrest in the global currency markets.

However, European Central Bank President, Jean-Claude Trichet is expected to support an increase in the fund.  The ECB has come under pressure to increase its bond-buying as the zone peripheral countries struggle to manage their debt.

On Thursday, Switzerland, a leading trader in the zone, held interest rates at current levels in efforts to stabilize euro zone economies.  Despite the euro’s instability, Switzerland continues to prosper.

Similar Posts:

Share

Post comment