Markets see both debt and EU in need of restructuring
PARIS ? An eventual restructuring of some eurozone debt and big changes in how the European Union and eurozone functions are now seen as probable and even inevitable, analysts say.
German Chancellor Angela Merkel may have said this week that she sees "absolutely no case of a eurozone country in ... a situation" where it would need to restructure its debt.
But markets are thinking otherwise.
"It will be very difficult to avoid (a restructuring of debt) for all the countries," Thomas Mayer, an economist at Germany's largest private bank, Deutsche Bank, told the Frankfurter Allgemeine Zeitung daily.
Restructuring government debt "is considered more and more in the market as a valid option to resolve the current crisis," said Credit Agricole CIB, although it called the move a "poisoned chalice" rather than a "panacea."
The French bank said that in order to ensure future growth the European Union needed to make a fundamental change in its philosophy and structure, with rich countries providing direct help to poor countries.
"The EU budget, in particular, would have to be enlarged to provide fiscal transfers to deficit counties," the French bank said.
The European Union and International Monetary Fund were expected to wrap up Sunday a bailout package for Ireland worth 85 billion euros (114 billion dollars).
The second bailout in six months in the eurozone following the 110-billion-euro rescue for Greece in May, it was driven by market uncertainty and a desperate effort to keep the crisis from spreading.
Reducing that uncertainty is likely to be key to containing the crisis.
German officials, including Merkel, sparked it off with calls for private investors to share the burden in future bailouts.
"In essence Merkel wasn't wrong to suggest that bond holders may ultimately have to bear some cost in a restructuring," Rabobank Senior Currency Strategist Jane Foley told AFP.
"But she shouldn't have said what she said when she did without clarifying" that she meant it would only apply when a new EU rescue mechanism went into effect in 2013.
Merkel tried to soothe market anxiety by making those points on Thursday.
A restructuring would cause widespread pain as retirement and savings funds invest in government bonds, and it would likely hurt many banks that invest in them as well.
Germany, already Europe's paymaster and which has come out even stronger from the global economic crisis, is likely to be in the driving seat as European leaders confront how to remedy the bloc's financial ills.
Markets will be looking for some quick indications as to how they plan to do this, as well as concrete steps to reduce deficits.
Along with continued pressure on Spain and Portgual, which are seen as vulnerable, the markets may pounce again on Ireland if it fails to approve its austerity budget on December 7.
Investors have continued to push up yields on their bonds, or the interest rates they must pay to borrow, despite stiff austerity measures.
One investment strategist in Paris, who declined to be named, argued that the situation would last "for as long as the market is not confident about the ability of a country to apply a real austerity policy."
Tensions on the inter-bank lending market have also been rising, which could dent lending to companies and individuals.
Markets may begin to get some clear indication of the outlines of a permanent EU rescue fund following a December 10 meeting of French and German officials.
Certainly investors will be hoping to get more news at the next EU summit on December 16.
Markets will also be looking to see in which direction EU leaders want to take the bloc to resolve the underlying structural problems that created the current crisis.
Analysts believe that a key problem has been the failure to enforce fiscal discipline within the eurozone, and EU leaders have already indicated they plan to toughen the bloc's financial rules.
"Critics have always argued that it is very difficult to have a monetary union without fiscal union and they have been proved to be correct," said Rabobank's Foley.
Credit Agricole, one of Europe's largest banks, said European countries have lived under the impression they could fudge the question whether they were a club of nations and a federal state.
"EU members must now specify precisely what their project/agenda is and build appropriate institutions and tools to manage it," said the bank. "This is the only way to strengthen market confidence, in our view."
The desire to achieve growth would drive the EU into increased "fiscal solidarity," or transfers from rich countries to poor.
"Once again the euro area appears to have arrived at a pivotal moment," said James Nixon of Societe Generale bank.
"Macro fundamentals appear to have gone out the window. In their place is the growing realisation that the single currency's fundamental flaws are now laid bare. Without internal fiscal transfers the euro area is going to really struggle."
Rabobank's Foley noted that Europe went ahead with the euro despite of the monetary union's failings because of a vast amount of political will among its leaders.
"It is this political will which will likely get it through the crisis, though the next few months will be critical," she said.
Copyright � 2010 AFP. All rights reserved. More �
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