Saturday, November 27, 2010

Europe Tries to Contain Debt Crisis

Reassurances Fail to Stem Fears That Woes Will Infect Portugal and Spain; EU-IMF Aim to Wrap Up Irish Aid Package

European finance officials set the stage for an Irish aid package they hope to complete Sunday, betting that billions of euros for the country's beleaguered banks and strained public finances will restore calm to the euro zone.
But they struggled to rise above broad fears that the debt crisis has already trampled Ireland on its way to Portugal and even Spain—the euro-zone's fourth-largest economy, representing about 10% of the currency bloc's economic activity.

"It's absolutely, completely false," European Commission President José Manuel Barroso said, echoing assurances from Berlin, Lisbon and Madrid that officials hadn't already moved on to Portugal or its much larger neighbor. "It has neither been asked for and neither have we suggested it," he said.
A Spanish government spokesman said, "The EU isn't asking Portugal to take money, and Spain of course is not either."
Spanish Prime Minister José Luis Rodriguez Zapatero added there is "absolutely" no chance Spain will seek a bailout.
View Full ImageAssociated Press
Spain's Finance Minister Elena Salgado, with the country's first Deputy Premier and Interior Minister Alfredo Perez Rubalcaba, in Madrid on Friday.

Portugal's parliament on Friday passed a budget for 2011 that aims to reduce the country's deficit from 9.3% of gross domestic product in 2009 to below 3% by 2013, and Prime Minister Jose Socrates said he hoped it would help calm markets.
"We must put Portugal out of the focus of the crisis. This budget will defend the country against the euro-zone crisis," Mr. Socrates said.
That wasn't enough to reassure investors. The euro tumbled against the dollar to $1.3248 in New York Friday. The yield premium that investors demand to hold 10-year Spanish sovereign bonds rather than German bunds widened to a fresh euro-era record of 2.67 percentage points. The spread later recovered to 2.59 percentage points, still 0.07 percentage points higher than Thursday.

The spread between Portugal's 10-year bonds and bunds was 4.33 percentage points, compared with 4.53 on Wednesday, according to Thomson Reuters, and 3.71 as November began.
Another concern, stoked this week by Bundesbank President Axel Weber, is that the cost of bailing out Ireland, Portugal and Spain could exceed the lending power European leaders built into the €750-billion ($1 trillion), three-year plan they laid out after organizing a separate package of aid to keep Greece from defaulting in the spring.
In comments over two days in Paris and Berlin, Mr. Weber speculated about Portugal and Spain following Ireland into an EU aid package, saying that the euro zone would readily provide the funds to bridge any gap. The day before Mr. Weber spoke, the European Commission was floating a plan to double the portion of the three-year plan supplied by euro-zone governments, currently €440 billion, according to people familiar with the matter.

Germany is strictly opposed to any increase to the existing package. "We have an instrument to deal with crisis in the euro zone and we are working intensively on Ireland," German Finance Minister Wolfgang Schäuble said in an interview Friday on German radio.
"I hope by the start of next week we have the necessary decisions in Europe so that we can have calm in the markets again so that we can put an end to this completely over-the-top speculation," Mr. Schäuble said.
The details of Ireland's aid package—which will come from the EU and the International Monetary Fund, as did Greece's €110 billion package in the spring—are uncertain, but it is likely to total around €85 billion. European finance ministers are to discuss details in a conference call Sunday, Spanish Finance Minister Elena Salgado said.

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