Dublin: CRISIS IN EUROPE: Individual National Currencies May Replace Faltering Euro

12 Jul

DUBLIN (Reuters) – A commitment to lower interest rates for countries borrowing from Europe’s rescue fund should cut Ireland’s debt servicing costs and makes it unlikely that French demands for a rise in corporation tax will succeed, the Irish finance minister said on Tuesday.

Euro zone finance ministers late on Monday pledged to lengthen the maturity of debt and lower the interest rate on loans from the European Financial Stability Facility (EFSF), the euro zone‘s rescue fund, in an attempt to bring the bloc’s debt crisis under control.

Ireland has been asking for lower rates on its European loans, expected to total 40 billion euros (35 billion pounds), but has faced opposition from France, which wanted Ireland to raise its 12.5 percent rate of corporation tax in return.

Ireland is borrowing 17.7 billion euros from the EFSF and 22.5 billion from the European Financial Stabilisation Mechanism (EFSM), the EU’s rescue fund, and by 2013 its interest repayments will swallow 20 percent of tax revenues.

Noonan said the plan would make it hard for France to push through its demand.

“(It) will make it difficult for countries like France to re-enter with a quid-pro-quo,” he said.

He said Ireland would probably start to benefit from a smaller debt repayment burden over the medium term.

“When the benefits will click in it is difficult to say, but it seems to me they would be medium to long term rather than immediate.”

“They would express themselves by lower interest rates in forthcoming budgets. I am not saying there will be a benefit in the December budget (for 2012) but there should be benefits in subsequent budgets.”

“The significance of the breakthrough will only be established when it’s spelt out in the next month or so.”

SENSE OF FOREBODING

Investors judged the measures too vague and dumped the euro, peripheral euro zone government debt and European shares as concern mounted that Italy, the euro zone’s third-largest economy, was being dragged into a crisis until now viewed as a problem for peripheral states.

“If there wasn’t the problem in the market concerning Italy and Spain, I’d be pretty euphoric about this breakthrough,” said Noonan. “There is a sense of foreboding about the position in Italy and Spain.”

With falling domestic demand hitting spending-related tax receipts, Noonan has said the country may target an extra 400 million euros in spending cuts and tax increases for next year, raising its adjustment goal for 2012 to 4 billion euros.

The Minister for Public Expenditure told reporters on Tuesday that the adjustment goal for 2012 remained 3.6 billion euros but a decision on the final size would be made in late autumn.

“The agreed figure is 3.6 billion euros,” Brendan Howlin said.

“We are making decisions in real time. Obviously the situation is fluid. What’s happened in the last couple of days indicate that nothing is absolutely fixed.”

Euro zone officials are hoping concrete decisions on Greece can be taken at another meeting later this month, as the threat of contagion to Italy and Spain grew with bond yields remaining under pressure on Tuesday.

Noonan commented that the clock is ticking for talks over Greece, particularly how the private sector banks will contribute to the sustainability of the Greek position.

“All this needs to be in place by about the 15th of September which means the decisions will have to be made about Greece or about the new bailout package for Greece by the first of September at the latest.”

European Union leaders are set to hold an emergency summit on Friday after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens’ debt and stop contagion to Italy and Spain.

Ministers gave no indication on Monday that they had broken a stalemate over how to make banks, insurers and other funds share the cost of additional funding for Athens. Germany and others want the private sector to provide around 30 billion euros in a new package for Greece that could total 110 billion euros.

10-year Irish government bond yields were trading around 13.5 percent, holding near the euro-lifetime high reached in the previous session of around 13.86 percent. The spread over equivalent German Bunds — a measure of the risk attached to holding Irish debt — was last at 1,080 basis points.

(Additional reporting by William James; Editing by Anna Willard

NEWS UPDATE:

Belgian Finance Minister Didier Reynders, left, and Greek Finance Minister Evangelos Venizelos, center, speak with European Central Bank President Jean-Claude Trichet during a round table meeting of eurozone finance ministers at the EU Council building in Brussels on Monday, July 11, 2011. European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of a second bailout for Greece. (AP Photo/Virginia Mayo)

Belgian Finance Minister Didier Reynders, left, and Greek Finance Minister Evangelos …

European Central Bank President Jean-Claude Trichet, left, enters the room with Greek Finance Minister Evangelos Venizelos prior to signing a copy of the 'European Stability Mechanism' on the sidelines of a meeting of eurozone finance ministers at the EU Council building in Brussels on Monday, July 11, 2011. European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of a second bailout for Greece. (AP Photo/Virginia Mayo)

European Central Bank President Jean-Claude Trichet, left, enters the room with Greek …

BRUSSELS (AP) — The debt crisis shook Europe’s core on Tuesday as market fears grew over the stability of Spain and Italy, forcing a rethink of the currency union’s strategy to restore trust in its future.

Markets took a nosedive on worries that the eurozone’s third and fourth biggest economies — both too expensive to save with Europe’s rescue funds — may become the crisis’ next victims.

On the one hand, investors are concerned by the EU’s determination to get banks to share the burden of bailouts, even at the cost of triggering a Greek default. On the other, they see in EU disagreements over giving Greece more aid the ominous signs of a drop in commitment to the currency union.

The mix of uncertainty proved toxic for markets. The sell-off extended to Italy, one of Europe’s stable core economies, which despite its high debt had so far escaped the turmoil that has crippled the eurozone for a year and a half.

The contagion “could mark the beginning of the end for the single currency union in its current form,” Jonathan Loynes, economist at Capital Economics.

As so often before, the eurozone finance ministers were pushed into action only when the markets gave them no choice.

Italy’s government sped up approval of its austerity plan and the EU opened the door for a complete overhaul of the region’s bailout fund, which has so far focused on handing out rescue loans to countries on the brink of collapse in return for high interest rates and painful austerity measures.

The pledges calmed market nerves — for the day, at least. The euro bounced back above $1.40 from as low as $1.3885 in the morning and Milan’s stock index swung to a 1.2 percent gain after being down as much as 4.4 percent.

“We said we are ready to test, whether, as part of the private sector involvement, an expansion of the toolkit is necessary and appropriate — such as prolonging (loan) maturities and lowering interest rates,” said German Finance Minister Wolfgang Schaeuble. “Everything can help to improve debt sustainability and defend the euro as a whole.”

Schaeuble did not exclude new powers for the eurozone’s rescue funds, such as buying up the bonds of troubled countries on the open market, which could lower the debt weight and help stem market jitters, especially for a country like Greece, which few economists believe can stand on its own feet again without substantial additional support.

Until very recently, Germany, the eurozone’s largest economy and the biggest contributor to the region’s bailout fund, had firmly ruled out such expanded powers.

Schaeuble indicated that the heightened market panic may have led to a change in opinion. “We never before had such an intensive and honest debate over the real issues,” he told journalists at the end of a two-day meeting with his counterparts in Brussels.

But while the promises of more support stabilized European markets by the close of the day on Tuesday, sentiment remains fragile as the eurozone’s top officials — once again — remained thin on details and appeared to disagree among themselves.

Calm will return to markets only if “all the countries of the eurozone assume their responsibility, in particular the most powerful countries,” Spanish Prime Minister Jose Luis Rodriguez Zapatero told reporters in Madrid.

The comment seemed to be a direct rebuke to German Chancellor Angela Merkel, whose reluctance to anger taxpayers at home has blocked previous efforts to get ahead of the debt crisis.

Because of the heightened tensions, this week could become crucial to the eurozone’s ability to survive the crisis. EU President Herman Van Rompuy said there may be a special summit of EU leaders in Brussels Friday, the same day as the results of long anticipated bank stress test will be revealed.

While the finance ministers struggled in Brussels, Italy worked to restore confidence in its ability to tackle its debt pile, some 120 percent of economic output and one of the biggest in the eurozone.

Italian Premier Silvio Berlusconi said the government will bring forward the timetable it has for a raft of austerity measures, which are now meant to pass through parliament by Sunday, instead of waiting until August.

Berlusconi said in a statement that the turmoil in Italian financial markets in recent days has prompted the government to accelerate and strengthen the measures, so that the country can have a balanced budget by 2014.

“It is necessary to eliminate every doubt on the efficiency and credibility of the austerity measures,” Berlusconi said in his first public comments since speculators started pushing up the interest rates Italy pays on its debt.

Berlusconi, who has been weakened in recent local elections and referendums on his policies as well as a sex scandal, expressed confidence that the government and opposition would work together “to defend the country.”

The comments helped the Italian 10-year yield drop back down to 5.55 percent from above 6.0 percent earlier, while the Milan stock index turned positive to trade 1.2 percent higher — its first rise in days.

____

Barry reported from Milan. David McHugh in Brussels, Maria Grazia Murru in Rome and Daniel Woolls in Madrid contributed to this story.

NEWS UPDATE:

Fears Debt Crisis Will Engulf Italy And SpainEnlarge Photo

Fears Debt Crisis Will Engulf Italy And Spain

Fears are growing that Europe’s sovereign debt crisis is spreading and could swallow up larger countries like Spain and Italy.

Eurozone finance ministers met on Monday to try and find a way forward on the second bailout for Greece.

But their statement is unlikely to reassure the markets that the crisis is under control.

Sources at the meeting say the issue of a structured default for Greece was discussed.

The Spanish economy minister, Elena Salgado, said: “We have insisted that the private sector must participate on a voluntary basis and this must be focused on guaranteeing the sustainability of Greece’s debt.”

But analysts say financial calm will not be established until the EU can show political unity and clarity over the plan to deal with an economic crisis which is threatening to kill off the single currency in its present form.

The contagion is spreading to larger eurozone countries and bringing with it the risk of a series of catastrophic nightmare scenarios.

In Italy’s case, it could be a perfect storm for the euro and the EU.

As the zone’s third-largest economy it is too big to fail but also too big to save with a bailout – the EU’s present and ineffective solution to the solvent debt crisis.

Global stock markets have taken a battering on fears over Italy because the money men know Europe’s banks are heavily exposed to Italian debt.

The country has a high level of sovereign debt and its cost of borrowing to service that debt is rising whilst growth is stagnant, deepening fears over its ability to pay its way.

The state of Italian politics is bringing another dimension to the economic crisis engulfing the country.

Infighting between Prime Minister Silvio Berlusconi and his finance minister Giulio Tremonoti is a worrying sign for the markets.

If the people at the top are squabbling they are not going to be focusing their attentions on a constructive solution to the escalating fiscal mess.

Political paralysis is not ideal when it comes to driving through the necessary austerity measures.

At the heart of the Eurozone’s problems – and the US’ – is something else, however.

The financial meltdown represents something much more fundamental and that is the transference of power from West to East

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