The head of the European Commission on Thursday urged eurozone leaders to re-think their currency’s financial defences, admitting debt contagion has now spread beyond the euro periphery.
As the European Central Bank revealed governors had voted overwhelmingly to resume purchases of sovereign bonds from troubled countries like Italy or Spain, Jose Manuel Barroso urged “a rapid re-assessment of all elements related to the EFSF (European Financial Stability Facility) and concomitantly the ESM (European Stability Mechanism).”
“It is clear that we are no longer managing a crisis just in the euro-area periphery,” Barroso warned in a letter sent to the 17 eurozone leaders.
A July 21 deal on a second bailout for Greece has failed to prevent sharply higher debt-risk premiums for Italy and Spain, the eurozone’s third and fourth-largest economies.
Benchmark 10-year bond yields for both were still hovering above six per cent, close to the seven-per cent mark considered unsustainable and which in the past year triggered bailouts for Greece, Ireland and Portugal.
Last month’s agreement included a new, 160-billion-euro ($226 billion) package of financial aid for Greece, almost one-third funded by private sector investors.
It also changed the EFSF’s scope, allowing it to relieve debt-stricken nations by buying their bonds at lower prices on secondary markets and providing bailouts for their banks.
Asked if Barroso also wanted the size of the funds re-assessed, commission spokeswoman Karolina Kottova said “all elements might well include size as well” as “flexibilisation” of the 440-billion-euro EFSF and the 750-billion-euro ESM scheduled to replace it in 2013.
In Frankfurt, ECB president Jean-Claude Trichet said a program of bond buying implemented when Greece’s troubles first threatened to spread last year, but that had lain dormant for months, remained in place.
Market sources later confirmed the ECB was actively buying eurozone government debt.
However, when asked about Barroso’s call for a bigger war-chest, Trichet said the most important thing was that all decisions taken on July 21 are implemented “fully and rapidly,” underlining that “this is of the essence.”
Barroso hinted at difficulties in negotiations on the small print, such as how easy to make it for the rescue funds to be applied in early-warning preventive mode, or how far to go in terms of demanding hard collateral in exchange for loans.
“These changes should also avoid introducing excessive constraints in terms of either additional conditionality or collateralisation of EFSF lending,” Barroso said.
Markets have concerns that the EFSF and ESM cannot match the ECB’s limitless warchest, and there is also unease that the involvement of private bondholders in the second rescue for Greece sets a precedent, despite denials.
Barroso said the changes agreed in July, giving the EFSF the possibility of “precautionary use, recapitalisation of banks and intervention in secondary bond markets, are not having their intended effect on the markets.”
The commission chief attributed market pressure on euro states to slow global growth and US debt problems as well as “first and foremost, to uncoordinated communication and the complexity and incompleteness of the July 21 package.”
Some within the eurozone have been pushing for European Union president Herman Van Rompuy to be tasked formally with leading the Eurogroup of 17 as well as chairing their emergency summits, a job notionally held by Luxembourg’s Jean-Claude Juncker.
