One by one, the parliaments of the European countries wary of bailouts are ratifying the new rescue fund, but hopes for a rapid resolution to the continent’s debt crisis are fading.
Finland on Wednesday approved a plan to beef up the European Financial Stability Facility (EFSF) in spite of opposition from the True Finns, the party that used its no-bailout stance to make huge electoral gains in the April elections.
Germany, the main financial backer of the EFSF, is expected to do the same on Thursday. Austria is to follow on Friday.
The rolling approvals – Italy, France and Spain have already signed on – are giving the impression that the EFSF will finally deliver the power needed to prevent the Greek debt crisis from wiping out the debt markets in Italy, Spain and perhaps France.
But support for a stronger stability fund appears motivated by fear that refusing to endorse it would potentially obliterate the euro zone. And investors who dove back into stocks this week on the hopes that Europe’s debt crisis is finally getting the political action it needs are likely to be disappointed, some economists and strategists say.
“The reality is that the markets are demanding the impossible,” said Marshall Auerback, chief portfolio strategist at Denver-based hedge fund Madison Street Partners. “They want this all fixed in the next few weeks, but the politics are insurmountable. You can’t create a fiscal union is six weeks.”
New doubts that the EFSF will be able to work its magic quickly weighed down the markets Wednesday after a strong run on Monday and Tuesday. In London, the FTSE-100 index lost 1.4 per cent and Germany’s DAX index shed almost 1 per cent. Major benchmarks in North America dropped about 2 per cent.
Investors also remained worried about ripple effects of Italy’s fiscal challenges. Italy plans a debt issue Thursday, the first since Standard & Poor’s cut the government’s credit rating earlier this month. With yields on 10-year Italian bonds at 5.9 per cent on Wednesday, the Thursday auction is bound to be one of the Treasury’s most expensive sales. The spread between 10-year Italian bonds and German bonds, at 3.68 percentage points, is near a record high.
Thursday’s German parliament decision would extend the powers of the €440-billion ($615-billion) EFSF, allowing it recapitalize banks, buy the bonds of euro zone countries in the secondary markets and provide liquidity loans to countries with unsustainably high borrowing costs.
Crucially, it would be given the right to use leverage – borrowing power – to boost its effective size by €1-trillion or more. But already there are disagreements as to whether the EFSF should be enlarged and, if so, how. The idea of using loans or loan guarantees from the European Central Bank to boost the fund had not gone over well with the ECB itself or the German Central Bank. German Finance Minister Wolfgang Schauble has not ruled out allowing the EFSF to borrow, but has made it clear that it would have to be done in an “efficient way,” that is, without jeopardizing Germany’s top credit rating.
The European Union is squabbling over another issue that threatens to gum up any effort to stop the debt crisis, according to the Financial Times. The European Commission, the EU’s executive body, is opposing the idea, floated by Germany, the Netherlands and some other governments, of imposing bigger writedowns on banks’ holdings of distressed Greek sovereign debt. Germany and the others want greater private sector involvement in reducing Greece’s debt load.
Meanwhile, the markets are being spooked by the EC president Jose Manuel Barroso’s endorsement Wednesday of a tax on financial transactions. The proposed tax could raise €55-billion a year, he said in his state of the union speech.
One indication that the enhanced EFSF may be insufficient to put out the euro zone’s debt fires came from Germany’s Roland Berger, one of the world’s biggest strategic consultancies. It has called for the creation of a “Hellenic Recovery Fund,” which would see Greece sell a bundle of state assets, including real estate and utilities, to the EU for €125-billion. Greece would use the cash to repurchase bonds from the ECB and the EFSF. The plan would reduce Greece’s debt to 88 per cent of gross domestic product from 145 per cent, Roland Berger says.