Market rout as Berlin rejects call for more EU action

WALL STREET recorded its worst day since the depths of the credit crisis three years ago as Germany and the Netherlands rejected…

WALL STREET recorded its worst day since the depths of the credit crisis three years ago as Germany and the Netherlands rejected calls by European Commission president José Manuel Barroso for a stepping up of the euro zone response to the debt crisis. Mr Barroso specifically called for a rethink of the rescue mechanism that funds weak countries such as Ireland and may have to support Italy and Spain.

The US market closed down 4.24 per cent after a day which saw heavy falls on European markets as intervention in the bond markets by the European Central Bank failed to calm fears about the solvency of Italy and Spain.

European Union economic and monetary commissioner Olli Rehn will hold a press conference in Brussels today on “ongoing developments in the euro zone”.

It was also reported last night that French president Nicolas Sarkozy will discuss the situation in financial markets with German chancellor Angela Merkel and Spanish prime minister José Luis Rodríguez Zapatero today after talking to ECB president Jean-Claude Trichet yesterday.

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The announcement followed signs of a rift between the European Commission and Germany over how to respond to the market’s anxiety over Spain and Italy. Madrid said yesterday it would not proceed with a planned debt issue following steep increases in its borrowing cost in recent weeks.

Mr Barroso said measures agreed just 15 days ago in Brussels when leaders met for an emergency summit “are not having their intended effect on the markets”. He criticised the “complexity and incompleteness” of the July 21st package and urged “a rapid reassessment of all elements related to the European Financial Stability Facility” (EFSF).

The German chancellor’s officials issued a sharp rebuff, describing the letter as unwelcome and unnecessary.

The Dutch finance ministry rejected reopening the discussion.

The July 21st deal on the expansion of the EFSF has yet to be enacted in national parliaments.

A spokeswoman for the Department of Finance said the relevant Irish legislation had been prioritised for passage through the Oireachtas in early September “in light of this week’s events and its impact on the euro zone area”.

Traders in Dublin talked of “carnage” yesterday as the Iseq index of Irish shares fell 3.4 per cent. Most of the world’s leading markets fell heavily as investors worried about the European debt crisis and global growth prospects generally fled for safer investments such as US government bonds. Most major stock indices entered “correction” territory, having fallen more than 10 per cent this year.

The signs of divisions between euro zone members over how to respond to the latest phase of the 18-month old euro crisis are unlikely to reassure markets today.

A further fissure emerged yesterday between the ECB and the German central bank over how to respond to the crisis. As the ECB confirmed in the afternoon it was holding interest rates at 1.5 per cent, Mr Trichet caused surprise when he announced the relaunch of its unorthodox programme to buy bonds of weak euro-area governments. The programme, launched in May last year, had been dormant for more than four months.

“We were not unanimous” in the decision to relaunch the programme, Mr Trichet said, but added that an “overwhelming majority” of the 23-person governing council supported the move.

It was also reported that the German central bank was not part of that overwhelming majority which backed the ECB’s buying of government bonds.