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EU agrees new debt plan, but near-term help needed

By Gabriele Steinhauser

Associated Press

Published: Friday, Dec. 17 2010 3:30 a.m. MST

British Prime Minister David Cameron arrives for an EU summit in Brussels, Friday, Dec. 17, 2010. European Union leaders are changing the treaty that underpins the bloc to make room for a huge new rescue system for countries that get into debt trouble in the long term. But they aren't ready to beef up the bailout fund they have in place today.

Michel Euler, Associated Press

Enlarge photo»

BRUSSELS — Even though EU leaders have agreed on a new rescue system for future debt crises, rating agencies' increasingly pessimistic view on some euro nations' ability to handle debts added pressure Friday to come up with more short-term measures to ease the crippling market turmoil.

EU leaders decided not to beef up the their existing bailout fund at a summit in Brussels, as they wrap up a punishing year that has rocked the world's confidence in their ambitious experiment to share a currency.

Markets seemed somewhat relieved by the one financial decision the EU leaders have made at this summit: to change the treaty that underpins their bloc to allow for a permanent rescue plan for countries that get buried in debt beyond 2013. Stocks and the euro rose slightly in European trading Friday morning, despite worries that the move doesn't do enough to deal with the current debt turmoil.

Rating agency Moody's Investors Service downgraded Ireland's government bonds by five notches Friday, citing the country's ailing banking sector, which was the main cause for a massive bailout from the EU and the International Monetary Fund last month. The downgrade follows warnings over the ratings of highly indebted Spain, Greece and Belgium earlier this week.

EU leaders Thursday night said they would do "whatever is required" to safeguard their common currency. But they stopped short of introducing new showstopping measures, such as boosting the size of the eurozone's existing €750 billion ($992.85 billion) bailout fund or introducing pan-European bonds to ease vulnerable states' borrowing costs.

The heads of state did agree on tweaking the bloc's central treaty to allow them to set up a new tool to deal with debt crisis among the 16 countries that use the euro after 2013, when the existing bailout fund expires.

EU governments had decided to set up the so-called European Stability Mechanism at their previous summit in October and finance ministers outlined its broad features at the end of November.

The mechanism is more than a bailout fund. It will provide rescue loans to countries that face a crisis of liquidity — that is, if they can't access money quickly enough to pay off their debts. Crucially, however, the ESM will also be able to force private creditors to assume some losses when a country is deemed insolvent.

"It is a major decision," Jose Manuel Barroso, the head of the EU's executive Commission, said Friday.

Champions of the mechanism argue that it is necessary to protect taxpayers in economically strong countries like Germany from having to pay for the profligacy of 'peripheral' countries like Greece or Portugal.

Finance ministers of the 27 EU nations will now begin working out details of the new mechanism, including how much money eurozone nations are willing to chip in and when exactly private creditors would be involved.

But analysts warned that the new mechanism didn't address the region's existing debt woes.

"The new ESM should safeguard the eurozone's financial stability in the future," ING economist Carsten Brzeski said in a note. "However, it is to some extent window-dressing as it does not solve the current crisis. European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013."

Many economists warn that anemic or nonexistent economic growth, paired with anxiety about the health of the banks and surging borrowing costs, will make it difficult for countries like Greece, Ireland, Portugal or possibly much larger Spain to pay off their debts.

Those concerns were echoed in Moody's warning over Ireland's debt Friday. The rating agency dropped Ireland's rating to Baa1 from Aa2, citing losses from Ireland's banking sector, which has already received a €45 billion capital injection from the government following a bruising real estate crash.

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