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In Europe debt crisis, markets and masses wait for Merkel to blink

All three have dug in their heels as the euro currency heads for a cliff. Finance ministers meet in Brussels and OK the latest bailout installment for Greece.

November 29, 2011|By Henry Chu, Los Angeles Times
  • German Finance Minister Wolfgang Schaeuble answers reporters' questions as he arrives for a meeting on the European debt crisis in Brussels. Finance ministers from the 17 Eurozone countries convened to discuss how to buoy financially distressed nations and to release more emergency loans for Greece.
German Finance Minister Wolfgang Schaeuble answers reporters'… (Yves Herman / Reuters )

Reporting from London — In the white-knuckle game of chicken that the euro crisis has increasingly become, three players are staring one another down: the markets, the masses and Merkel.

As time runs out to save the shared currency and avert global economic pandemonium, the question of who will blink first is likely to become clear over the next few days while European leaders prepare for a crucial summit. All three players are refusing to budge, making it difficult to tell who will yield or whether their intransigence will result in mutually assured destruction.

On Tuesday, finance ministers from the 17 Eurozone countries agreed in Brussels on how to increase the firepower of their bailout fund and on releasing about $11 billion in emergency loans to Greece so that it can avoid bankruptcy. The meeting was a prelude to the leaders' summit next week at which France and Germany are expected to press for rewriting the rule book in order to knit the Eurozone more tightly together, centralizing control over national budgets and finances to ensure that members of the club stick to the rules on debts and deficits.

With time running short and investors scrambling for the exits, European leaders — especially German Chancellor Angela Merkel — are under intense pressure to do more than push for stronger fire safety codes when the building is already in flames.

At the same time, angry citizens are thronging Europe's streets to put politicians on notice of their intent to fight the harsh austerity measures that the markets and international finance officials have demanded. Governments or leaders of six European countries have fallen within the last year because of the debt crisis.

The markets, meanwhile, have turned up the heat dramatically in the last month, showing their disdain for officials' latest crisis battle plan by rushing to unload sovereign debt and making it prohibitively expensive for governments, even those in the core of Europe, to borrow money.

At a bond auction Tuesday, Italy was forced to pay interest rates nearing 8%, about the same sky-high level that forced Greece, Ireland and Portugal to seek bailouts. Borrowing costs have also shot up for Spain, Belgium and even France.

Along with dissatisfaction, the markets have demonstrated fickleness. Investors know Italy is too big to rescue; pushing it into bankruptcy would trigger a worldwide financial calamity that would only boomerang on the investors themselves. Yet they continue to drive up Rome's borrowing costs, even though the fundamentals of the Italian economy remain the same as they were a few months ago, when the interest rate on the country's bonds was half what it was Tuesday.

And arguably, Italy is in a better position now to implement much-needed structural reforms under its new technocratic leader, Mario Monti, who replaced the man widely seen by the markets as an obstacle to an economic overhaul, former Prime Minister Silvio Berlusconi. The same is true in Spain, where a party committed to fiscal rigor and reform just won a landslide election.

"There are one or two positive aspects that the markets aren't looking at right now," said Julian Callow, chief European economist for Barclays Capital.

Instead, investor panic, in many ways self-reinforcing, has reached such a pitch that even a bond auction for Germany, the economic lodestar of Europe, had dismal results last week, despite the fact that no rational actor believes Berlin is in any danger of turning into a deadbeat nation.

Callow said the markets' reaction is due partly to their diminished confidence that Europe can get its act together in time to resolve the debt crisis.

And that, virtually everyone agrees, comes down to Merkel, Germany's leader.

The markets have been frustrated by her flat-out refusal to consider measures they think would at least stanch the bleeding if not heal the wound. Foremost among these are allowing the European Central Bank to buy up the bonds of troubled nations and issuing "eurobonds," collective debt backed by all 17 Eurozone nations.

Eurobonds were reportedly on the agenda for discussion at Tuesday's meeting of finance ministers in Brussels, but no breakthrough was announced. Officials said only that Greece would receive the rescue loans it needed to prevent a messy default and that the Eurozone would increase the firepower of its bailout fund by insuring up to 30% of government debt.

The zone will also explore the possibility of contributing more money to the International Monetary Fund, which could then be repackaged as aid to troubled euro countries such as Spain and Italy that are having difficulty raising money in the commercial markets, said Jean-Claude Juncker, the prime minister and finance minister of Luxembourg.

An idea similar to eurobonds to ease the debt crisis is to create "elite" bonds backed by the zone's most creditworthy countries, such as Germany and Austria, to help prop up wobbly ones, though with stringent conditions attached.

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