The head of the International Monetary Fund has today criticised Europe's piecemeal response to the euro-zone debt crisis after Germany and other states resisted his calls for firmer action.
IMF managing director Dominique Strauss-Kahn yesterday failed to persuade finance ministers of the 16-nation single currency area to increase the size of their financial safety net or the European Central Bank to step up government bond purchases.
"The euro zone has to provide a comprehensive solution to this problem," Mr Strauss-Kahn told reporters after meeting Greek prime minister George Papandreou in Athens. "The piecemeal approach is not a good one."
Tension persisted on European bond markets today after euro zone ministers said they would take no new measures to tackle the risk of contagion spreading from Greece and Ireland, which have received EU/IMF bailouts, to Portugal and perhaps Spain and Italy.
The yield on 10-year Portuguese bonds was steady at about 6 per cent today, while both Italian and Spanish 10-year bonds increased marginally to about 4.5 and 5.2 per cent respectively.
Some central bankers and market participants say it would have been better to have put Portugal protectively under the EU-IMF financial umbrella last week at the same time as Ireland rather than dealing with one country after another.
EU finance ministers today agreed to conduct a new round of more rigorous bank stress tests in February after doubts about last July's first pan-European examination of their ability to withstand financial shocks sapped market confidence.
EU monetary affairs commissioner Olli Rehn said the new survey would be based on new financial architecture after just seven out of 91 European banks failed the previous health check.
"We need to opt for fullest possible transparency when conducting the bank stress test," he told a news conference.
Germany took the lead in arguing the existing safety net was sufficient, and ministers said they had not even broached a proposal for issuing joint bonds, opposed by Berlin.
The premium investors demand to hold the bonds of Portugal and Spain rose in response to the ministers' inaction. Traders said the ECB, which engineered a fall in both countries' borrowing costs last week by stepping up its purchases of government debt, was staying on the sidelines.
An ECB source, speaking on condition of anonymity, said the central bank did not want to take on all the risk of supporting euro zone debtors by massive bond-buying, and wanted governments to take additional measures such as increasing the rescue fund.
Luxembourg finance minister Luc Frieden summed up the ministers' approach. "We have all the tools to make sure that despite the temporary turbulence, financial markets should understand that there is no major risk for the stability of the euro zone," he said.
The European Financial Stability Facility (EFSF) has the capacity to issue bonds worth up to €440 billion to help out troubled euro zone member states, as part of an overall EU-IMF rescue fund of €750 billion.
Belgian finance minister Didier Reynders, who had proposed doubling the rescue fund, said he expected more discussion in the coming weeks about the size of the mechanism.
All 27 European Union finance ministers formally endorsed the €85 billion EU-IMF assistance package for Ireland, clearing the way for the first loans to flow to Dublin once the budget passes through the Dail.
Reuters