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Eurozone fires defy rescues and budgets

25 November 2010, 18:15 CET
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(BERLIN) - Germany moved Thursday to douse eurozone debt fires fed by its insistence that investors pay for bailouts, a stance that has kept Ireland and Spain at risk and financial markets on high alert.

In the face of recent dire comments about the fate of the 16-nation single currency zone, the head of the OECD also insisted that the bloc had a long and productive future ahead of it.

Pressure, both political and financial, intensified on Ireland, with the government facing demands for an early confidence vote as it seeks to secure an EU-IMF bailout and get a hard-hitting austerity budget through parliament.

On the financial market the interest rate Ireland must pay to borrow jumped above 9.0 percent to 9.01 percent, signalling the reluctance of international fund managers -- responsible for investing huge sums of savings -- to lend to a struggling government.

Borrowing costs for Spain rose again to 5.190 percent from 5.064 percent late on Wednesday in defiance of government assurances that the country will not need a rescue.

And in Portugal, where the government says its debt is under constant market attack, the bond yield edged up to 7.020 percent from 7.016 percent.

German Chancellor Angela Merkel in a speech in Berlin sought to clarify comments made a month ago that bondholders should share in the the cost of rescuing governments in which they have invested.

The German position, and uncertainty as to when any changes might take effect, intensified investor anxiety and cranked up financial market pressure on Ireland, Portugal and Spain.

Merkel on Thursday made clear that her proposal would apply only to bonds sold after an existing rescue scheme expired in 2013.

"There is a high degree of nervousness in the markets, and therefore I would like to make very clear here what I have often said," Merkel said.

"We are not talking about changing the current crisis mechanism that expires in 2013. Everything will stay as agreed. What we are talking about is a crisis mechanism for the future."

Merkel and French President Nicolas Sarkozy were due to hold talks by phone later on Thursday, with the German business daily Handelsblatt reporting that the German proposal was running into opposition in Europe, including from France.

The head of the Eurogroup of finance ministers, Jean-Claude Juncker, also voiced concern that Germany was trying to impose a solution on a follow-on crisis mechanism.

"What I am concerned about is that the joint method, that is to say a joint decision is taken by all of the members of the European Union, is not discredited in favour of an intergovernmental method, which would see the big states decide things between themselves," he was quoted as saying in the regional German weekly Rheinischer Merkur.

France and Germany are nonetheless working on a new crisis mechanism that would defend the euro against speculators.

"We are confronted today by an attack by speculators on Europe and on the euro, with countries that could appear fragile the first in speculators' sights," French Foreign Minister Michelle Alliot-Marie told reporters after meeting German counterpart Guid Westerelle in Berlin.

"Very rapidly there is going to be a system that will be a system allowing us to respond comprehensively and durably in order to ensure that the euro has a solid future."

Elsewhere in her speech Merkel maintained that eurozone countries had made good progress in bringing their deficits under control since the Greek crisis last May.

"I am more confident than in the spring that the eurozone will make it out of the current turbulence," she said.

The chancellor also said she saw no danger at present of any eurozone member being forced to restructure its debt.

The head of the Organisation for Economic Cooperation and Development, Angel Gurria, likewise offered a vote of confidence in eurozone prospects in the face of the current crisis.

"The euro as a currency has a long life, it is alive, well and kicking and more countries will be joining in the future instead of leaving," he asserted.

"The euro area is going to be growing and continue to be largest trading bloc in the world."


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