German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil.
As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a "snappy debt cut" as proposals that won't work.
"I'm convinced that none of these approaches, if applied right now, would bring about a solution of this crisis," Merkel said in a speech in Berlin today. "If politicians believe the ECB can solve the problem of the euro's weakness, then they're trying to convince themselves of something that won't happen."
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Merkel's comments underscore German reluctance to assume more liability for taming the debt crisis even as it moves on to France, the euro region's second-largest economy, and threatens to trigger a global recession. Merkel said that "political action" to tighten budget rules is needed to solve the turmoil.
Stocks worldwide fell for a fourth day, the longest stretch of losses in two months, as Europe's crisis festered. The yield on 10-year Spanish bonds rose 35 basis points to 6.76 percent, a euro-era high, while the premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points. The euro approached a five-week low against the yen and reached the weakest against the dollar since Oct. 10.
"Nothing spreads like fear," said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. "If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk."
French Finance Minister Francois Baroin renewed a clash with Germany over using the ECB as a backstop, saying in a speech in Paris late yesterday that central bank support for Europe's recue fund is the best way to counter the crisis.
The Frankfurt-based ECB itself has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB's remit.
"We consider that the best way to avoid contagion is to have a solid firewall" by giving the fund a bank license, Baroin said. "We haven't won the argument. We won't make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe."
Dragged In
The clash is intensifying as France, the second-biggest backer of the European Financial Stability Facility after Germany, is dragged more deeply into the crisis that began more than two years ago in Greece and has in the past week led to the ousting of Italy's Silvio Berlusconi.
The spread between French and German 10-year yields widened to as much as 204 basis points today as France sold 6.98 billion euros ($9.38 billion) of notes. Spanish bonds sank, driving 10- year yields to the highest since the euro was introduced in 1999, as borrowing costs climbed to the most in at least seven years at an auction of securities.
The yields on bonds of countries from Portugal to Finland, the Netherlands to Austria rose relative to Germany amid mounting concern the debt crisis is spreading.
Merkel, in her speech, said that Europe must flesh out the details on leveraging the EFSF rescue fund, while pressing for European Union treaty change to enforce budget control and reassure markets over the medium term.
The German chancellor reached out to the U.K. on the eve of Prime Minister David Cameron's visit to Berlin tomorrow, praising his effort to cut government spending and saying that "we want a Europe with Great Britain" that doesn't exclude any member country from the euro area.
She called for countries to drop national objections and agree on changes to EU treaties to tighten oversight over national budgets, saying amendments could be "very limited" and possibly apply only to euro countries. Treaty change is "indispensable to persuade markets that we will continue on our path together," she said.
President Barack Obama, speaking during a visit to Canberra yesterday, said financial-market turmoil will continue until European leaders persuade investors they have a convincing plan. Bank of England Governor Mervyn King and the U.K. Treasury said Europe's woes are the biggest threat to the British economy.
"I'm deeply concerned, have been deeply concerned — I suspect will be deeply concerned tomorrow and next week and the week after that," Obama said.
Rescue Efforts
The current market rout comes three weeks after European leaders completed an all-night summit to bolster their rescue efforts. They agreed to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what they called a comprehensive approach intended to end the crisis.
That effort is unlikely to be enough and requires further support from the ECB, according to Citigroup Chief Economist Willem Buiter.
"The only remaining show in town is the ECB," Buiter said yesterday on Bloomberg Television's "Surveillance Midday" with Tom Keene. "They may have to hold their noses, but they will have to do it," he said. "The notion that they can't do this because of their price mandate is nonsense."
French President Nicolas Sarkozy had earlier backed down over the role the ECB should play in fire fighting, acknowledging Germany's inter-war experience of hyperinflation, to help obtain the Oct. 27 accord among European leaders. "Germany has historic, almost sociological concern about central bank intervention," Baroin said in Paris.
Buiter, a former member of the Bank of England's monetary policy committee, suggested that Germany should look beyond that experience. "We're not asking for Weimar," he said.
Bloomberg News
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