European rifts deepen as markets reject fixes

Tensions among European leaders are breaking into the open as markets reject their fixes for a debt crisis that threatens to overwhelm the eurozone’s financial firewalls.
Nanjing Night Net

German Finance Minister Wolfgang Schaeuble sniped at Greek yacht owners in comments published yesterday while Spanish Prime Minister Mariano Rajoy declared “battle” on the European Central Bank. Austrian Finance Minister Maria Fekter retracted a forecast that Italy would need aid, and Spain pushed back against Finnish advice on how to use its 100 billion-euro ($126 billion) bank bailout.

Rifts are deepening with Greek elections on June 17 risking the first exit from the single currency as voters buckle under the continent’s most severe austerity program. Spanish bond yields reached a record after the nation’s request for aid for its banks fueled speculation the world’s 12th biggest economy may need a full rescue.

“What we’re seeing now says much about the deepening cracks in Europe’s political financial and economic edifice,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in a telephone interview.

Monti meeting

French President Francois Hollande, who is pushing back against the austerity measures advocated by Germany, will meet Italian Prime Minister Mario Monti in Rome today. Mr Monti called for a “credible package of growth measures” yesterday as he said Europe faces a “particularly intense and crucial phase.”

Borrowing costs for Spain and Italy, southern Europe’s biggest economies, rose yesterday, as disagreements between European leaders further undermined confidence that politicians are prepared to deal with the fallout from the Greek election.

“It’s not easy to cut the minimum wage in Greece if you think about all the yacht owners,” Mr Schaeuble said in an interview in Stern magazine. “But the Greek minimum wage is just dropping to the level of Spain. If the country wants to become competitive again, it has to sink.”

The yield on Spain’s 10-year debt rose to a euro-era record of 6.75 per cent yesterday while Italy’s benchmark bond yields increased to 6.22 per cent. The Spanish rate has jumped more than 50 basis points since Mr Rajoy agreed the bailout package of as much as 100 billion euros for the nation’s banks on June 9.

Battle cry

Mr Rajoy yesterday called for the ECB to take steps to ease the government’s interest costs in a letter to European Commission President Jose Manuel Barroso. Spain’s bond market has already received support from the ECB as banks channeled emergency central bank loans into government debt. Lenders took a record 263.5 billion euros from the central bank in April and the Bank of Spain will release data for May today.

“That is the battle we have to wage in Europe,” Mr Rajoy told Parliament in Madrid. “I am waging it.”

Hours later, Deputy Economy Minister Fernando Jimenez Latorre said Spain will stick to the tools it has used so far to shore up its banks, rejecting calls from Finland, one of the euro region’s six AAA rated sovereigns, to break up failing lenders.

Full bailout

Wrangling over the Spanish bank bailout is adding to concerns over the single currency’s future. The package will probably fail to avert a full sovereign bailout out for Spain, and Mr Monti may have to follow Mr Rajoy in seeking aid within months, James Nixon, chief European economist at Societe Generale said.

Mr Monti told the national parliament yesterday that the EU hasn’t time to wait for austerity plans to stabilise borrowing costs and officials must support growth as Italy slides deeper into a recession.

The Italian economy shrank by 0.8 per cent in the first quarter compared with 0.7 per cent in the previous three months and a 0.3 per cent contraction in Spain in the first quarter. The Italian Treasury is due to auction as much as 4.5 billion euros of bonds today. Yields jumped at a sale of one-year bills yesterday.

“Above all, Europe needs more growth,” said Monti, who visited Berlin late yesterday to receive an award from Schaeuble. The single currency area is “in a particularly intense and particularly crucial” situation, he added.

Greek vote

European leaders will meet in Brussels on June 28 in a attempt to plot a route out of the crisis.

Any measures may come too late for Greeks who will vote June 17 on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund as a condition of its bailout. New Democracy leader Antonis Samaras, who supports the bailout conditions, said backing Tsipras will see Greece thrown out of the euro.

“We have no sense that European partners will follow this tactic of blackmail heard from some quarters and stop funding,” Mr Tsipras, whose Syriza party is vying for first place in pre-election polls, said in an interview in Athens yesterday with Bloomberg Television. “Something like that would be catastrophic not only for Greece but for the entire euro area.”

Mr Schaeuble told the German magazine he had sympathy for the suffering of ordinary Greeks who were suffering because of decades of economic mismanagement by their leaders.

“I can’t spare him that,” the German finance chief said. “Crises are seldom fair.”

Bloomberg

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