European leaders split over solution to euro debt crisis

DIVISIONS DEEPENED among European leaders on how to deal with the euro debt crisis yesterday as turmoil in financial markets continued and fears grew about the banking sector.

The Belgian finance minister Didier Reynders added his voice to calls for common eurobonds. Mr Reynders said the euro zone had to prove it had “deep pockets” to reassure investors that euro zone banks were safe.

However, speaking at a political party rally, the German chancellor, Angela Merkel, in one of her most emphatic rejections of the eurobond proposal yet, described the proposal as a “slippery slope” that would probably leave everyone worse off.

European Central Bank executive council member Jürgen Stark weighed into the debate, saying jointly issued bonds were a “false solution”. Mr Stark, a German, is known for his dislike of unorthodox fiscal or monetary policies.

Divisions also deepened over the terms of Greece’s second bailout, which was agreed by EU leaders less than one month ago.

A number of governments have demanded that Greece put up collateral in return for its new funding.

Yesterday Austria sought to resolve that dispute by putting forward a proposal on how Greece could provide such collateral.

New questions about the details of the bailout package came as Greece’s finance minister Evangelos Venizelos said the Greek recession could be deeper than originally thought.

Among other things, this would make it more difficult to meet the budget targets set out in the terms of the bailout.

Yesterday’s divisions among euro zone countries took place against a backdrop of continued turmoil in financial markets.

Dr Merkel’s renewed rejection of a joint eurobonds proposal unsettled European equity markets, which had earlier staged a recovery from a very weak opening.

The chancellor’s comments sparked a sharp sell-off in the closing 15 minutes of trading, leaving European bourses firmly in the red.

Banking stocks remained at the eye of the storm as concerns mounted that a fresh funding crunch may be emerging in the sector. A gauge of European banks tumbled to its lowest level since 2009.

Over the week, Royal Bank of Scotland has led the slide, dropping 22 per cent, with Barclays close behind, nursing a loss of 20 per cent.

European share indices extended the dramatic losses suffered on Thursday. Germany’s DAX index fared worst with a decline of 2.2 per cent.

In Dublin, the Iseq shed 1.4 per cent, while France’s CAC-40 lost 1.9 per cent and the UK’s FTSE 100 slipped 1 per cent. Overall, European shares fell to their lowest level in two years.

A Dublin broker said last night one of the main causes of investor nervousness was the confusion in Europe.

“There doesn’t seem to be any coherent leadership,” he said. “European leaders don’t seem to have the will or the ability to solve the problem [of the debt crisis].”

In the flight to safety, gold set a fresh nominal high, and the Swiss franc strengthened further, as growing volatility whetted investor appetite for traditional safe-haven assets.

Analysts said yesterday that continued financial market turmoil and renewed concerns about a lurch back to recession in Europe and the US have made further interest rate rises by the ECB less likely. – (Additional reporting Reuters)