Europe tries to douse debt crisis

Published 10:21 am Friday, May 7, 2010

BRUSSELS — Amid ruthless financial turmoil, German Chancellor Angela Merkel today urged European leaders to sharpen the core rules underpinning the euro to avoid future debt crises like the one which has pushed Greece to the brink of chaos and threatened other fragile eurozone nations.

“We must sharpen the edge” of the rules to keep wayward governments in line, Merkel said, adding the 16 eurozone leaders should also consider changes to the 1992 treaty that laid the groundwork for the shared currency. “Otherwise, it won’t work, in my opinion.”

The euro has rules to stop governments from undermining it with reckless spending, limiting deficits to 3 percent of gross domestic product. But those rules were shown to lack teeth when even big countries such as Germany and France broke them without much in the way of consequences.

Merkel spoke ahead of an evening summit of the euro countries. Earlier, French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso huddled with EU President Herman Van Rompuy to assess the financial fallout of the past days which has financial markets testing the euro’s robustness.

Merkel, whose country holds the key to any solution, spoke today with U.S. President Barack Obama, who said he supported the effort to deal with the financial crisis in Europe.

After the euro dropped to its lowest level in 14 months and nervous bond markets dumped Greek debt, a summit originally called to sign off on the bailout and draw lessons for the future turned into one of crisis management.

EU leaders have insisted for days the Greek financial implosion is a unique combination of bad management, free spending and statistical cheating that doesn’t apply to other eurozone nations, such as troubled Spain or Portugal. They said the bailout should keep the problem from spreading to other countries by giving Greece three years of support and preventing a default when it has to pay euro8.5 billion in bonds coming due May 19.

Again today, European leaders while maintaining outward calm were almost desperately trying to talk away the problems.

Agreement on rescue for Greece “will be a demonstration of Europe’s force, of solidarity,” French Prime Minister Francois Fillon said after a meeting with Portuguese Prime Minister Jose Socrates. “We will protect Greece and reinforce the stability of the euro zone,” he said.

The markets have taken little heed. Stocks, Greek bonds and the euro plunged even after the head of the European Central Bank, Jean-Claude Trichet, tersely underlined that “Portugal is not Greece. Spain is not Greece” on Thursday. The euro fell to $1.2520, its lowest in 14 months, but recovered to $1.2721 later.

Along with the eurozone meeting, the G-7 finance ministers were holding a teleconference Friday on the crisis, according to Japan’s finance minister.

A French official who was not authorized to be named because of his office’s policy, said no completely new decisions were to be expected from today’s meeting but that some emergency measures could be discussed.

After struggling to get ahead of the crisis for weeks, European governments are now underlining their determination to act by speeding approval of their contributions to the a euro110 billion ($140 billion) emergency loan package for Athens.

The consequences of failure could be dire. Many economists think Greece will eventually default anyway, which could deal a sharp blow to the euro and lead to sharply higher borrowing costs for other indebted countries in Europe. Default, or market contagion to other countries could lead to panic, intimidating consumers from spending and making banks fearful to lend money to businesses and consumers.

In Germany, where bailing out Greece is unpopular, both houses of parliament approved the package Friday and sent it to President Horst Koehler for his signature. With Italy and France, that accounts for over two-thirds of the European part of the bailout package. The International Monetary Funds adds euro30 billion on its own.

Even Germany stressed how precarious the situation had become for the whole of Europe.

“The situation is very serious and no one can say that we are already out of the woods with today’s decision,” Foreign Minister Guido Westerwelle said after parliament approved its euro22.4 billion ($28.6 billion) slice of the package. “What is important now is that we must extinguish the fire so no brush fire spreads in Europe, and we must at the same time fight the cause of the fire.”

France, Italy and Portugal approved their share. Even as Portugal readied to loan to Greece, its own interest rate gap, or spread, between Portuguese and benchmark German 10-year bonds, was ticking higher — a sign that debt fears were infecting market views of Lisbon’s situation.

Today it rose nine basis points, or 0.09 percentage point, which means Lisbon would have to pay almost 6.2 percent in interest to borrow on the markets — its highest rate since before joining the euro.

Greek lawmakers approved drastic austerity cuts Thursday worth about euro30 billion ($38.18 billion) through 2012 — that will slash pensions and civil servants’ pay and further hike consumer taxes. The measures were a prerequisite needed to secure international rescue loans.

Today, Greek borrowing costs hit another record high and shares on the Athens stock exchange were lower amid losses in European markets and fears that Greece will have difficulty implementing its austerity plan.

European stocks fell but recovered most of their losses by early afternoon Friday. but in early action in New York, traders looked past a surprisingly strong report on the U.S. jobs market and focused instead on Europe’s spreading debt crisis. In the first hour of trading today, the Dow was off 182.96, or 1.7 percent, at 10,337.36.