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Bloomberg.com: Economy
Bloomberg.com: Economy
Steinbrueck Says Euro States May Bail Out Members (Update1)
By Rainer Buergin and Holger Elfes
Feb. 17 (Bloomberg) -- German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out other members of the 16-nation bloc that face problems refinancing their debt.
“Some countries are slowly getting into difficulties with their payments,” Steinbrueck said late yesterday in a speech in Dusseldorf. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.”
While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a “very difficult situation.” Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.
Steinbrueck is going further than his European Union counterparts in saying euro states can’t be allowed to fail. The EU governing treaty says member states aren’t liable for others members’ obligations. Spending to combat the worst downturn since World War II has forced governments to run up deficits that violate EU rules.
The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain: and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.
The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt.
‘Very Unlikely’
Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others.
The German government, presiding over Europe’s biggest economy, is “very unlikely” to provide help to troubled euro- region members by selling bonds jointly, Juergen Michels, an economist at Citigroup Inc. in London, said in an interview, adding that it would be a “very expensive solution.”
“The most likely option is that the European Investment Bank or some other multinational organization will start supporting these countries by buying government bonds or by providing direct support,” Michels said. “That would help narrow spreads and reduce refinancing costs.”
Investors should keep buying bonds of European governments that have “more flexibility in funding requirements in the short term,” Barclays Plc analysts said today.
It’s better to be “adding positions here rather than in the periphery, where any renewed funding concerns may weigh more heavily,” Huw Worthington, a fixed-income strategist at Barclays Capitalin London, wrote in a research note.
‘Worrying Developments’
Widening yield spreads are “worrying developments,” Luxembourg Finance Minister Jean-Claude Juncker, who represents the countries sharing the euro at international meetings, said at a Group of Seven gathering in Rome on Feb. 14, according to an unpublished prepared “speaking note.”
Michels said the EU can help governments that are finding it hard to sell their bonds without violating the bloc’s “no bail-out” clause. Any insolvency of a euro region country would be “fraught with significant costs” for the EU as a whole.
To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Holger Elfes in Dusseldorf at helfes@bloomberg.net
Last Updated: February 17, 2009 07:20 EST
