Euro Going Into 'Crucial' Month...[ 2948 ]

Euro Leaders Face Unrest Going Into 'Crucial' Month

 

A group of Spanish police officers face a crowd of protestors during a demonstration against the government's austerity measures in the city centre of Madrid, Spain. Photograph: Angel Navarrete

Bloomberg News//By Patrick Donahue on September 30, 2012

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Europe faces a month that may decide the success of the European Central Bank’s bid to end the debt crisis as leaders navigate a tougher approach from creditor countries, unrest in Spain and a looming report on Greece. 
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With the first of three summit meetings that European Union President Herman Van Rompuy has called “crucial” taking place in Brussels on Oct. 18-19, investor sentiment toward the euro area that surged in September is on the wane.
“People are beginning to look at this in a more sober way” after the ECB bond-buying plan and a German high-court decision releasing bailout financing spurred optimism over the past month, Clemens Fuest, an economist at Oxford University’s Said Business School, said in an interview yesterday. 
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October, which marks the third anniversary of the debt crisis, will showcase euro-area leaders fighting out their differences. The discord underscores the inadequacy so far of ECB President Mario Draghi’s bid to calm the crisis through a pledge on sovereign-debt purchases. 
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Spain’s 10-year bonds fell last week, with the yield rising 18 basis points, amid turmoil in the country. The euro, which surged 4.4 percent in the first two weeks of September, had its second weekly decline against the U.S. dollar last week, sliding 0.4 percent to $1.2860 on Sept. 28. 
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Spanish Prime Minister Mariano Rajoy, under pressure to trigger the ECB’s new financial weaponry by requesting assistance, pleaded over the weekend for national unity as he hit out at nationalists for hampering crisis-fighting efforts.

‘More Problems’

“The worst that can be done about the economic crisis that we are in at the moment is to break economic stability,” Rajoy told a Sept. 29 rally in Vitoria in Spain’s Basque region. Nationalists are trying to “cause more problems for people than we have at the moment as if there weren’t already enough.” 
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Rajoy suffered a setback last week when the president of the Catalan region, Artur Mas, called elections to seek greater self-determination for the regional government. Basque leader Inigo Urkullu, set to claim the regional presidency in an Oct. 21 vote, also said his party wants more autonomy.
With protesters crowding the streets of Madrid on Sept. 25, Rajoy’s government two days later unveiled a fifth austerity package in nine months along with measures designed to boost economic growth. EU Economic and Monetary Affairs Commissioner Olli Rehn said these go beyond recommendation for Spain’s overhaul. Spain’s Budget Ministry announced plans over the weekend to borrow 207.2 billion euros ($267 billion) next year, widening the country’s debt to 90.5 percent of gross domestic product.

Bailout Funds

“I don’t think we’re moving toward disaster, but it will become increasingly clear that regaining competitiveness will last a long time for these countries.” Fuest, who sits on an advisory panel for the German Finance Ministry, said by phone.
The EU’s Rehn said that leaders need to put aside 
disagreements, particularly on how the euro-area’s bailout funds can be deployed to recapitalize struggling banks. 
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A statement last week by finance ministers from Germany, Finland and the Netherlands that such funds can’t be used to cover past capital gaps marked a retreat from a key June agreement. 
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“It seems there have been different interpretations about the June decision,” Rehn said in an interview yesterday in Haemeenlinna, Finland. Rehn also warned Finland not to prolong the crisis with its “hard-line stance on many issues.”

Finance Ministers

The resistance by the three ministers to covering “legacy assets” with bailout funds would potentially upend the objective of most European governments to unburden states’ balance sheets of bank-rescue funding -- severing the destructive link between bank and sovereign debt. It would also deal a blow to Ireland’s campaign to reduce its debt load.
The issue, along with the ECB bond-buying plan, will be discussed when European finance ministers meet on Oct. 8-9 in Luxembourg. 
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Italian Prime Minister Mario Monti waded into the fray as well last week, saying that the ECB shouldn’t impose additional conditions on nations seeking assistance. Concern about what extra conditions might entail has contributed to the reluctance of countries such as Italy and Spain to tap the bond buying that they themselves championed. 
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Oversight should be limited to establishing “checks so the countries continue to behave in that positive way,” Monti told Bloomberg Television in New York on Sept. 28. “If this is the conditionality that will be finally delivered, should a country be in a market situation suggesting its use, there would be nothing dishonorable.”