Uncertainty hangs over Portugal and Spain’s chances of avoiding emergency calls on international assistance to meet their immediate financing needs.
Markets are watching today’s (2 December) meeting of the governing council of the European Central Bank (ECB) for signs of its determination to continue buying eurozone bonds to lower borrowing costs for struggling governments.
When eurozone finance ministers meet in Brussels on Monday (6 December) they will be obliged to plan their next steps without knowing whether Ireland can count on the €85 billion package they offered it just over a week ago.
Not until Tuesday (7 December) will the weakened Irish government put to a vote the four-year austerity budget on which the loan – and the recovery of its fiscal equilibrium – depends, and the outcome is still uncertain.
Yesterday the European Commission extended by one year its special state-aid rules for banks, recognising that they continued to need government help.
Meanwhile, urgent discussions proceed on the permanent crisis mechanism that EU leaders want to agree at their summit meeting on 16-17 December. Herman Van Rompuy, the president of the European Council, who will chair the meeting, has started a round of consultations with EU leaders on the mechanism. He will meet José Luis Rodríguez Zapatero, Spain’s prime minister, in Madrid on 10 December.
The deal reached last Sunday (28 November) to give Ireland €85bn in assistance from the EU and the International Monetary Fund did not have the hoped-for effect in reassuring financial markets that it is safe to hold debt from weaker eurozone economies. Investors continue to fear that they could be asked to share losses in the case of eurozone debt default as early as next year.
The situation on financial markets improved slightly yesterday, as Portugal, widely expected to be the next country to seek aid, succeeded in selling €500bn of bonds, although at a higher interest rate than a month ago.
Also yesterday, Spain announced a new package of measures to reduce its deficit, including changes in benefits for the long-term unemployed and in collective bargaining rules. The changes were welcomed by the Commission as a sign of the country’s determination to push through reforms.
The euro also made up lost ground against the US dollar yesterday as markets took comments made in the European Parliament by Jean-Claude Trichet, the ECB president, as a sign that the bank was prepared to continue its bond buying programme.
But analysts point to uncertainty in the markets, particularly about the planned permanent mechanism. They have not been reassured by Eurozone finance ministers’ agreement last Sunday that only in 2013 would collective action clauses be introduced, setting out procedures for deciding the share-out of any losses.
Nicolaus Heinen, of Deutsche Bank, said markets would need to see more clarity. “The markets have relaxed a little bit and it’s a good signal that an announcement for a permanent crisis mechanism was made a week ahead of schedule. But what needs to happen now is for the mechanism to be clearly defined.
“The markets also need some clarity regarding what will happen during the transitional phase of the permanent mechanism post-2013 because it’s not going to happen overnight.”
EU leaders are expected to agree the size of the permanent mechanism at their meeting.
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