- Associated Press - Thursday, November 25, 2010

BERLIN (AP) — The 16-nation euro currency will survive the debt crisis, German Chancellor Angela Merkel vowed Thursday, and a senior central banker said the European Union would be willing to increase its $1 trillion bailout fund if necessary.

As Mrs. Merkel spoke, the euro wallowed near two-month lows against the dollar. Some analysts predicted it would drop further as other heavily indebted countries, like Portugal and Spain, risk following Greece and Ireland in needing massive bailouts.

The euro was down 0.3 percent Thursday at $1.3297 — from a recent high of $1.4244 on Nov. 4.

“I’m more confident than this spring that the European Union will emerge strengthened from the current challenges,” Mrs. Merkel told business leaders in Berlin, referring to May’s 110 billion-euro ($146 billion) bailout of Greece by the EU and the International Monetary Fund.

She said the crisis has strengthened the eurozone, leading EU leaders to agree on new rules for a tougher growth and stability pact, and bringing into operation the 750 billion-euro ($1 trillion) emergency fund.

“We now have a mechanism of collective solidarity for the euro,” she said. “And we all are ready, including Germany, to say that we now need a permanent crisis mechanism to protect the euro,” Mrs. Merkel added.

Experts say that while rescuing Greece, Ireland or even Portugal is manageable for the EU’s emergency fund, bailing out Spain — whose economy is five times larger than any of the other three countries — would test its limits and threaten the euro’s existence.

Axel Weber, the head of Germany’s central bank and a leading rate-setter at the European Central Bank, said European nations would be willing to boost the emergency fund by as much as 100 billion euros ($133 billion) to fully cover the total public debt load of Greece, Ireland, Portugal and Spain.

The four countries’ debt load totals a little more than 1 trillion euros, and Mr. Weber said about 925 billion euros are already guaranteed — adding up the 110 billion euros Greek loan package, the 750 billion-euro fund and the government bonds bought by the ECB — leaving only a gap of about 100 billion euros.

“It’s not the euro that is in danger, it’s the fiscal policy in some member states that got out of hand,” Mr. Weber said. “The euro is one of the world’s most stable currencies,” he added.

A spokesman for the EU’s Monetary Affairs Commissioner Olli Rehn, however, said there were no discussions to boost Europe’s emergency fund. “The financial backstops are in place and they are well and substantially funded,” said Amadeu Altafaj Tardio.

The leaders of Germany and France, the eurozone’s twin economic engines, were discussing the European debt crisis in a telephone call later Thursday.

In the markets, investors continued to put pressure on Portugal and Spain, keeping their borrowing costs near euro-record highs. That reflects market uncertainty about the countries’ ability to pay off debts amid an economic downturn — and fears that they will also need massive bailouts. Markets demand a higher return on bonds issued by countries seen as a risky investment.

“Uncertainty has got a firm grip on the market, that much is clear,” said Filipe Silva, a debt manager at Portugal’s Banco Carregosa. “Comments by [European leaders] aren’t giving the market any sense of direction.”

Mr. Silva said there was a clear trend toward pulling investments out of the eurozone’s weaker economies.

The head of the EU’s bailout fund, Klaus Regling, also defended the integrity of the eurozone.

“No country will voluntarily give up the euro — for weaker countries that would be economic suicide, likewise for the stronger countries,” Mr. Regling said in Germany’s Bild newspaper Thursday.

The rise in yields threatens to cause trading losses at foreign banks and pension funds that hold Portuguese and Spanish debt, because the value of bond holdings falls as the yields rise.

French banks are the most exposed to both countries’ debt, with German and Spanish banks also holding sizable amounts. However, analysts say these banks have enough capital buffers to withstand a drop in the value of their bond holdings, as they did when Greece’s debt markets plummeted earlier this year.

In Ireland, banking stocks continued to drop amid mounting expectations that they will be fully nationalized during the country’s impending bailout.

Mrs. Merkel insisted again Thursday on setting up new rules to deal with sovereign debt problems that would come into effect after 2013. She stressed, however, that no eurozone member at the moment requires debt restructuring.

Analysts and politicians have blamed Germany’s insistence on making investors share the pain of bailouts for the recent rise in interest rates on Irish, Portuguese and Spanish bonds. EU finance ministers have said the new mechanism would only apply to bonds issued after 2013 but that has failed to abate market tensions.

Mr. Weber, head of Germany’s Bundesbank, said the markets’ nervousness was due to the fact that the plan was announced but details left unclear. He added a transparent solution for a permanent crisis mechanism should now be found as fast as possible to calm the markets.

“We need a crisis mechanism that we don’t have to improvise each time during a crisis,” Mr. Weber said. He also backed Mrs. Merkel’s stance that private creditors should in the future also share a part of the burden.

The new crisis mechanism is supposed to replace the 750 billion-euro financial backstop set up by eurozone governments and the IMF in May, after intervention to save Greece.

The EU’s executive commission will release its plan for the new bailout rules in early December.

Earlier in the day, France and Germany’s foreign ministers said their nations would be able to provide swift assistance for Ireland, which is negotiating an estimated 85 billion-euro ($115 billion) EU-IMF bailout.

But French Foreign Minister Michele Alliot-Marie said Europe is facing a “speculative attack” against the euro “in which those countries that could appear weak in the eyes of speculators are put under pressure.”

Ms. Alliot-Marie underlined the importance of intervening quickly in markets to prevent further destabilization and supported Mrs. Merkel’s call to set up the new bailout mechanism.

“Now we want to reinforce these regulations to have a crisis mechanism that allows us not only to react, but to prevent these speculative attacks,” Ms. Alliot-Marie said.

To get the bailout, Ireland on Wednesday unveiled a plan to cut 15 billion euros ($20 billion) from its deficits through 2014. Opposition leaders in Dublin, however, vowed Thursday to rewrite Ireland’s harsh four-year austerity plan if, as expected, they oust Prime Minister Brian Cowen in early elections next year.

Ireland’s deficit this year is forecast to reach 32 percent of GDP, a modern European record, fueled by the billions it has spent bailing out Irish banks who gorged themselves on overpriced real estate.

In Italy, students protested education cuts for a second day, occupying both the Leaning Tower of Pisa and Rome’s Colosseum. Students formed a human chain around Pisa’s famous tower to prevent tourists from entering and marched around the Colosseum with banners reading “No profits off our future.”

Gabriele Steinhauser in Brussels, Barry Hatton in Lisbon, and David Stringer and Shawn Pogatchnik in Dublin contributed to this report.


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