Eurozone under pressure to aid euro with more cash

By Pan Pylas

Associated Press

Published: Monday, Dec. 6 2010 12:00 a.m. MST

BRUSSELS — European officials wrestled over whether to commit more money to help stabilize the euro as the European Central Bank revealed it has stepped up purchases of government bonds in an attempt to restore confidence in the EU's single currency bloc.

Finance ministers gathered Monday in Brussels to find ways to fight the debt crisis that has rocked the currency bloc, while the European Central Bank said it splashed out €1.965 billion ($2.57 billion) buying government bonds in the week leading up to Tuesday. That was up from €1.345 billion the week before and the highest weekly amount in months.

Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting.

Market participants suspect the stabilization in European bond markets since the meeting has been largely due to even more purchases by the central bank, under pressure from policymakers to do more to prevent Europe's debt crisis from spreading to Portugal, and more dangerously to much larger Spain, following earlier bailouts of Greece and Ireland.

In total, the ECB has bought €69 billion worth of government bonds since May, when it was given the right to do so following the bailout of Greece. Buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.

Though the pressures on Europe's highly indebted countries has waned somewhat over the past few days, Europe's debt difficulties remain.

"Last week's bond buying by the ECB was a short-term panacea but it does not resolve the underlying problems," said Neil MacKinnon, global macro strategist at VTB Capital.

A proposal Monday for the creation of pan-European bonds by the head of the so-called eurogroup, Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti sparked speculation on how far eurozone governments would go to shore up confidence in the currency as well as their public finances.

Additionally, some officials want to put up more money, while Germany says the current, €750 billion ($1 trillion) bailout fund is enough.

European finance ministers have to figure out how to fund a new crisis tool that is supposed to support countries that run into financial trouble after 2013, when the current fund's madate expires. Greece and Ireland have already been bailed out after high borrowing costs shut them out of the bond market, and many fear Portugal or Spain could follow.

Crucially, this so-called European Stability Mechanism will force private creditors to share the pain if a nation is deemed insolvent — that is, if its debts are too big to repay. However, if a government merely faces a liquidity crisis — it can't access funds fast enough to meet payment deadlines — it is supposed to get rescue loans from the new mechanism.

The ministers agreed on the broad outlines of the new mechanism late last month, but didn't say where the money for the emergency loans would come from.

The threat of potential losses for private bondholders like banks and hedge funds, which were spared in this year's bailouts, has spooked government debt markets in recent weeks and reopened debate on whether the existing bailout fund will big enough in case large economies like Spain or Italy run out of money.

Belgian Finance Minister Didier Reynders said over the weekend that eurozone countries should increase the existing fund now and not wait until the new stability mechanism has been set up. On Monday, he said the size of the current fund would be on the table at the finance ministers meeting.

"First we have to discuss how to set up the permanent mechanism and based of that we'll see if there are changes to the provisional mechanism," he said.

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