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Euphoria over euro rescue fades

12 May 2010 03:19 (UTC +04:00)

Baku-APA. Germany moved to chip in its share of the bold $1 trillion rescue package for the euro â€” even as stocks and the euro fell Tuesday on concerns the massive loan program only puts off the day of reckoning for the continent’s indebted governments, APA reports quoting News.yahoo.com web-page.

Chancellor Angela Merkel’s Cabinet approved Germany’s euro123 billion ($157 billion) part of the euro750 billion package agreed by the European Union and the International Monetary fund to support the euro and contain the continent’s debt crisis.

Parliament is expected to approve it within three weeks. "The measures are a clear signal that financial markets can rely on the stability of the euro and that speculation against the euro is not worth it," Merkel’s spokesman Christoph Steegmans told reporters.

The size of the package sparked euphoria and helped boost the currency and stock markets Monday, as fears of an immiment financial panic that would cripple banks and growth faded. But by Tuesday afternoon, the good mood seemed to fade. The euro slipped to $1.2700 in late European trading â€” more than a cent down from $1.2804 in New York late Monday.

The plan was praised for its size, which for the moment seems to have halted fears the Greek debt crisis will immediately engulf other weak countries such as Spain and Portugal. But long-term, analysts say that it doesn’t cut the government debt loads and that with weak growth European governments will struggle to pay.

"Unless measures are taken to deal with the underlying structural problems affecting the most indebted of eurozone nations, then the bailout package merely kicks the can down the road," said Michael Hewson, analyst at CMC Markets.

The package consists of emergency loans that would be made available to keep troubled governments from defaulting.

That is intended to reassure panicky bond markets that governments can pay, and to keep skittish investors from driving up borrowing costs in a vicious circle.

European officials were turning to concerns about the rules restricting government deficits, rules that were supposed to prevent crises such as Greece’s trip to the edge of bankruptcy. But those rules have long been flouted, and analysts are waiting to see if the EU can finally put a lid on debt.

French Finance Minister Christine Lagarde said the Greek crisis is a "wake-up call for all of us on public finances are concerned and I’m sure it will be followed by appropriate review of the kind of policies and public finance policies and not necessarily just in the euro zone."

The European Commission is to start the process on Wednesday by presenting proposed new rules tightening control over countries spending. Some are skeptical about how willing governments will be to give up even a part of their power to decide spending and taxation.

The package "could thus be seen as the start of closer fiscal ties within the EMU," said Jane Foley, research director at Forex.com. "There is, however, a massive stumbling block to this insofar it implies a reduction of autonomy from member sovereign states over fiscal policy."

"On the assumption that Europe is not ready to move closer to a federal system, the risk that Greece must be allowed to default at some stage or leave the EMU still remains."

The plan, adopted after frantic talks lasting into the early hours of Monday, consists of a euro60 billion ($76 billion) European Commission lending program, euro440 billion ($560 billion) in new loans by the 16 euro nations, and euro250 billion ($318 billion) from the IMF.

Germany’s share is at least euro123 billion but could go up to euro150 billion, according to opposition politicians who were briefed by Merkel Monday afternoon. Germany will have to shoulder more if countries facing financial troubles of their own should be unable to hand out loans.

The debate surrounding the latest bailout package, meanwhile, was intensifying in Berlin as lawmakers started discussing the measure. It is to go to the parliament floor next week and will likely be passed by the upper house June 4.

Opposition leaders Juergen Trittin of the Greens and Gregor Gysi of the Left Party have voiced dissatisfaction that it remained unclear how much the German taxpayer will be billed. Nonetheless, the Greens said they might vote with the government parties in support.

Greece, meanwhile, will formally request the first part of a separate European Union emergency bailout later Tuesday, officials in Athens said. The loan will be worth euro14.5 billion ($18.81 billion), while a further euro5.5 billion ($7.13 billion) is due from the IMF on Wednesday â€” for which no formal request is required.

The loan is part of a separate euro110 billion loan package by eurozone countries and the IMF for Greece which received its final green light last weekend.

"Greece will make an application to the European Commission later today for the first section of the loan, which is worth euro14.5 billion," a finance ministry press officer said, speaking on customary condition of anonymity.

Athens needs the money by May 19, when it has to redeem some euro9 billion ($11.67 billion) in expiring debt.