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Bond market jitters misplaced, Germany says

Published: 12 Nov 2010 08:09 GMT+01:00

"Any new (bailout) mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements," finance ministers from Britain, France, Germany, Italy and Spain said in the declaration, issued at a G20 summit in Seoul.

Germany is backing a plan to force private investors to bear a share of bailout costs for countries facing fiscal ruin.

But German Finance Minister Wolfgang Schäuble stressed Friday this would only take effect in three years, and was not to blame for the rise in interest yields on Irish government bonds to record levels.

He said investors were guilty of a "total misunderstanding."

"It has to do with decisions from the European Council (EU leaders), and it's a total misassessment of the issues at hand.... It has absolutely nothing to do with any current discussion, and you can't get them mixed up," he added.

Ireland's cost of borrowing hit record highs on Thursday. Ten-year government bond yields jumped to 8.929 percent, the highest level since the euro was created in 1999, placing Europe's bond markets under serious strain.

The leap fuelled fears that the eurozone debt and deficit crisis could be entering a dangerous second phase just six months after a massive bailout of Greece, to which Germany was the biggest contributor.

Portuguese bond yields also hit historic peaks on Thursday.

German Chancellor Angela Merkel said Thursday that European taxpayers should not pay the whole cost of rescuing debt-laden countries.

“Let me put it simply - there may be a contradiction between the interests of the financial world and those of the political world," she said at a G20 business summit in Seoul.

"We cannot explain to our voters and citizens why taxpayers must finance certain risks, and not those who made a great deal of money taking those risks."

Under Merkel's proposals, future rescue packages would only be launched if government bondholders agree to bear some losses.

EU leaders agreed last month to design a permanent plan of aid and penalties for eurozone countries facing fiscal ruin, to take over after the lifespan of a current crisis response fund ends in 2013.

But the European ministers stressed Friday that "the EFSF (European Financial Stability Fund) is already established and its activation does not require private-sector involvement," adding that the new system from 2013 "could include a range of possibilities."

"Whatever the debate within the euro area about the future permanent crisis resolution mechanism, and the potential for private sector involvement in that mechanism, we are clear that this does not apply to any outstanding debt and any programme under current instruments," they said.

European Commission president Jose Manuel Barroso said Thursday that the European Union was prepared to stand by Ireland.

"What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary," said Barroso.

Irish bond yields - the rate of return paid to investors holding the government debt instruments - have soared in the face of mounting investor unease at the stretched public finances. Later this month, Finance Minister Brian Lenihan will unveil a four-year programme of austerity measures that will involve a €15-billion correction to rein in the huge public deficit, ahead of the annual budget in December.

AFP/ka

The Local (news@thelocal.de)

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