BERLIN, German Chancellor Angela Merkel dug her heels in ahead of what promises to be a week of intense negotiations, stressing on Wednesday that there are no concrete plans to use the European Financial Stability Facility to buy euro zone sovereign bonds on the secondary markets, but verfied that it’s possible under the agreements governing the bailout fund.
But Ms Lagarde, speaking after a meeting in Luxembourg of the finance ministers of the 17 countries that use the euro, said the IMF had found the situation in Europe to be dire.
Ms Merkel stamped on the idea of mutualising debt — favoured by France, Italy and Spain — at a meeting of deputies from her Free Democratic coalition partners in Berlin, according to people who attended the closed door session.
Merkel was even sterner, dismissing “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” besides violating German law.
She dismissed a Monti plan last week to use the funds — the temporary European Financial Stability Facility or the permanent European Stability Mechanism — to buy bonds, and spelled out her opposition to directly recapitalising banks.
Christine Lagarde urged leaders of the 17 countries that use the euro to consider jointly issuing debt, aiding troubled banks directly and perhaps relaxing strict austerity conditions on countries that have received aid – all measures that Ms Merkel, the leader of the eurozone’s largest and most powerful economy, has resisted.
She was also pressed to change the rules to allow bailout funds to operate like banks and purchase the sovereign debt of Italy and Spain without conditions.
Significantly, Germany’s conservative party leader Volker Kauder told another meeting of lawmakers that eurozone governments were discussing making it possible to remove preferred creditor status from the ESM rescue fund.
Neither Ms Merkel nor Finance Minister Wolfgang Schaeuble, who insisted on that treaty clause to make private bondholders take first losses in any future debt restructuring by bailed out states, spoke out in favour of such a move, the sources said.
Debt restructuring is a process that allows a private or public company â€“ or a sovereign entity â€“ facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
Investors, meanwhile, briefly pushed Spanish bond yields over the key threshold of 7 percent on Thursday, a level that had previously prompted international bailouts for Greece and two other members of the 17 nation euro zone.
Merkel and the Italian and Spanish prime ministers, Mario Monti and Mariano Rajoy, and discuss the euro zone crisis before next week’s European Union summit meeting.
Moniqua Hope is a business journalist based in Hokkaido, Japan. Moniqua has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Moniqua spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.