Germany rejects calls over debt fund

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German Chancellor Angela Merkel rebuffed calls today for a bigger euro zone financial safety net or joint euro bonds, as finance ministers appeared split on how to stem the 16-nation currency area's debt crisis.

International Monetary Fund chief Dominique Strauss-Kahn urged the ministers to increase the size of a €750 billion bailout mechanism for debt-stricken states and suggested the European Central Bank step up purchases of government bonds, an IMF report obtained by Reuters showed.

But EU paymaster Germany, Europe's biggest economy, rejected any such moves and also dismissed a call by two veteran finance ministers for joint euro bonds guaranteed by all governments.

"I see no need at this time to increase the fund," Mrs Merkel told a news conference in Berlin.

"Only a very small percentage of it has been used."

She was supported by Dutch finance minister Jan Kees de Jager, who said it was premature to discuss what would happen if the fund ran out of money.

European Monetary Affairs Commissioner Olli Rehn said the question of upgrading the rescue fund, known as the European Financial Stability Facility, was one of the issues on the agenda of the monthly Eurogroup meeting.

Ireland last week became the second country after Greece to require an EU/IMF financial rescue.

Some diplomats say putting more money on the table now might be interpreted as a sign that the EU is preparing for a possible bailout of Spain, the euro zone's fourth largest economy, and could aggravate market tensions.

Mrs Merkel also said European Union treaty rules did not allow for issuing common bonds, which she said would reduce the element of competition and remove the interest rate incentive for fiscal good behaviour.

The ECB engineered a dip in the soaring borrowing costs of weaker euro zone states late last week by stepping up purchases of mainly Irish and Portuguese government bonds. Figures issued today showed the central bank bought €1.965 billion worth of government bonds in the week to December 3rd, its biggest weekly tally since the end of June.

But yield spreads of euro zone periphery countries over safe-haven German Bunds resumed their rise today, as did the cost of insuring their debt against default, as investors doubted finance ministers would agree on a common approach.

Many analysts say only sustained, massive central bank bond-buying can reverse the trend.

Wide differences remain among euro area governments over how to overcome the debt crisis that threatens to spread to Portugal, Spain and possibly Italy.

Jean-Claude Juncker, chair of the Eurogroup finance ministers, and Italian finance minister Giulio Tremonti outlined a proposal in today's Financial Times for a joint sovereign bond, or "E-bond".

They said this would send a signal of "the irreversibility of the euro" to citizens and markets, where some experts have started to question the future of the currency.

Under the Juncker/Tremonti plan, governments could issue euro bonds equal to a maximum 40 per cent of their gross domestic product - less than the EU treaty limit of 60 per cent. Beyond that limit, they would have to issue national bonds, which would carry a higher yield depending on their country's credit risk.

Mr Rehn told reporters he found the idea "intellectually attractive" but the EFSF safety net, based on loans guaranteed by member states, was the only game in town for now.

German finance minister Wolfgang Schaeuble warned in a newspaper interview that the risk of an anti-euro political party emerging in Germany should be taken seriously.

The euro has become more unpopular among Germans since this year's €110 billion financial rescue of heavily-indebted Greece, which ran counter to a "no bailout" principle established before the euro was created in 1999.

Tomorrow, ministers from the broader 27-nation European Union are expected to approve formally an €85 billion aid package for Ireland and discuss the reform of EU budget rules.

Jim O'Neill, chairman of Goldman Sachs Asset Management, said the idea of common euro zone bonds made sense, and new ideas now emerging would eventually underpin European monetary union with stronger central leadership.

Mr O'Neill, whose division manages some $800 billion in assets, also said it was worth considering buying a basket of euro zone peripheral sovereign debt at current prices.

In comments that could fuel market pressure on Madrid, Austrian chancellor Werner Faymann was quoted as saying that Spain would resist to the last but may not be able to avoid seeking a bailout.

Spain approved privatisation plans by decree last Friday, promised accelerated pension reform, raised tobacco tax and cut wind-power subsidies in moves to assuage financial markets and reduce the government's big 2011 borrowing requirement.

Spanish economy minister Elena Salgado said increasing the euro zone rescue fund was "not the question for the moment".

Portugal, widely seen as the next euro zone "domino" at risk, approved a tough 2011 budget last month and has promised to deepen labour market reforms but analysts doubt they will deliver sufficient change to make a big difference.

Reuters

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