Eurozone scrambles to calm investors

Germany and other world economic powers scrambled late on Sunday to shore up confidence in global financial markets with pledges to do whatever was necessary to protect the euro currency and stem the debt crisis.

Eurozone scrambles to calm investors
Photo: DPA

Issuing a statement in the early hours of Monday morning, the G7 vowed to maintain financial stability, while the Frankfurt-based European Central Bank pledged to buy eurozone bonds to protect Spain and Italy.

“We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth,” a G7 statement said, as Asian markets dipped on re-opening amid fears over the state of the global economy.

“We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe,” it said.

“The US has adopted reforms that will deliver substantial deficit reduction over the medium term,” said the statement, published after a flurry of telephone talks presided over by French Economy Minister Francois Baroin.

Germany and France, the two biggest eurozone economies, called on Sunday for full implementation of measures agreed at a eurozone summit in July to safeguard the single currency as markets braced for fresh turmoil this week.

“President (Nicolas) Sarkozy and Chancellor (Angela) Merkel reiterate their commitment to fully implement the decisions taken by the heads of state and government of the euro area and the EU institutions on July 21,” a joint statement said.

“In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries,” it added.

France currently heads the G7, which also groups Britain, Canada, Germany, Italy, Japan and the United States.

“In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions,” the G7 statement said.

The European Central Bank had said earlier it would make major purchases of eurozone bonds. This was after Italy and Spain announced new measures and reforms to boost their economies.

Eurozone debt markets will be focused on any purchases of bonds issued by Italy and Spain, the third- and fourth-biggest eurozone economies, for signs of ECB activity. The central bank itself never identifies which bonds it buys.

To add to the turmoil, Standard & Poor’s in a shock move Friday cut the US rating to AA+ from the top notch triple-A for the first time.

Washington has been split over how to reduce its more than $14 trillion debt without further hobbling the sluggish economic recovery, and its limited debt deal came after a bruising partisan battle.

International Monetary Fund chief Christine Lagarde welcomed the pledges by the ECB as well as France, Germany and the G-7 to stabilise the financial markets, saying: “This cooperation will contribute to maintaining confidence and spurring global economic growth.”

Officials from the Group of 20 and Group of Seven economies held emergency conference calls and leaders of major powers worked the phones ahead of the opening of New Zealand financial markets, the first to trade in Asia.

In Washington, the US Treasury said Secretary Timothy Geithner will not step down despite opposition calls for him to leave because of the downgrade.

Fears of a global meltdown, which some see as potentially worse than the 2008 collapse, sent vacationing leaders into a flurry of phone calls between Berlin, London, Paris and Washington to stem the tide.

The ECB is the only European Union institution capable of acting fast and mustering enough financial firepower to convince markets not to test Italy and Spain, but at the cost of possibly fuelling inflation and damaging its own independence and credibility.

“The central bank is the only institution that can act quickly, and without a budget constraint,” Goldman Sachs analyst Francesco Garzarelli noted.

It is also the eurozone’s last line of defence because investors no longer believe that “politicians have a strategy for dealing with Italy and Spain,” noted Will Hedden, a trader at IG Index.

Italy, the eurozone’s third largest economy, saw its borrowing costs hit record highs last week amid falling confidence over its massive debt – equal to 120 percent of total annual output –along with poor growth prospects and political tensions.

Italian Prime Minister Silvio Berlusconi vowed lawmakers would return early to push through additional austerity measures including a constitutional amendment to force governments to keep balanced budgets.

Spain announced new reforms to bring in an additional 4.9 billion euros ($7.0 billion) and help curb its public deficit.

An ECB statement said it considered “decisive and swift implementation by both governments as essential.”

A Royal Bank of Scotland statement welcomed the ECB move, saying “bond buying will stop the collapse of the bond market in countries under stress.

“This policy response is in our view necessary and welcome even if it does not address the underlying weaknesses of the system: high private and or public debt, a lack of fiscal integration, the absence of a euro area wide banking regulator with binding powers,” it added.

AFP/The Local/djw

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Paris, Berlin agree on future eurozone budget: French ministry source

France and Germany have agreed on the broad outlines of a proposed eurozone budget which they will present to EU finance ministers in Brussels on Monday, a French finance ministry source said.

Paris, Berlin agree on future eurozone budget: French ministry source
French Economy and Finance Minister Bruno Le Maire (R) and German Finance Minister and Vice-Chancellor Olaf Scholz. File photo: AFP

The common single-currency budget was one of French President Emmanuel Macron's key ideas for protecting the euro, but it caused differences between France and Germany, the region's two largest economies.

French Finance Minister Bruno Le Maire and Germany's minister, Olaf Scholz, will “jointly present a proposition on Monday… about the layout for a budget for the eurozone,” the ministry source told AFP.

“It's a major step forward,” the source said. “We will look forward to sharing with other members.”

The source said the amount of the budget has not been established as the proposal was to first set out the “architecture and main principles” of the budget.

According to a copy of the French-German proposal, the budget would be part of the EU budget structure and governed by the 19 euro members.

Macron will travel to Berlin at the weekend to meet with German Chancellor Angela Merkel where the two leaders will bolster their alliance as champions of a united Europe.

READ ALSO: France and Germany push for compromise on eurozone reform