The EU promises to bail out eurozone members
About a week ago I reported on an Austrian story that the EU was gearing up for a bailout of any eurozone members which found themselves in difficulty (see my post, “EU planning 200 billion euro package for Eastern Europe“. This report is now being confirmed by multiple sources including Joaquin Almunia, the economics commissioner of the European Union.
Ambrose Evans-Pritchard of the Telegraph writes:
Joaquin Almunia, the economics commissioner, said EMU economies in distress can count on EU solidarity if they get into trouble, rather than having to go cap in hand to the International Monetary Fund.
“It is clear that there are serious problems in certain countries. If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. We are equipped intellectually, politically and economically to face this crisis scenario. It’s not clever to tell you in public. But the solution exists,” he said.
Mr Almunia said the probability of a eurozone break-up is “zero”, despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. “Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing,” he said.
Officials are keeping a close eye on renewed stress in Europe’s credit markets. The iTraxx Crossover index measuring default risk on low-grade corporate bonds jumped above 1,100 yesterday, nearing the panic levels after the Lehman collapse last year.
Certainly, downturns in Greece, Ireland and Spain are part of this. However, at issue here as well is the recent acknowledgement by market participants that there is serious exposure in countries like Austria to downturns in Central Europe, the Balkans, and the Baltics and Eastern Europe. Some of those countries are doing their own PR campaign in order to distance themselves from their more challenged EU brethren.
The central banks of the Czech Republic, Bulgaria, Poland, Romania and Slovakia have issued a joint statement defending their economies.
They said that recent warnings about their economies were “misleading”.
Eastern European countries have come under scrutiny in recent weeks amid fears about their economic prospects and reliance on foreign debt.
The countries’ currencies and stock markets have also fallen sharply as the downturn has intensified.
Hungary’s central bank later said it supported the statement issued by it counterparts.
The central banks urged investors to look at the prospects of individual countries and not assume that Eastern Europe was a “homogenous region”.
Better-off countries like Czech Republic and Poland feel that they are unfairly lumped together with places such as Hungary or Latvia, which have been particularly hard hit.
They expressed concern at the warnings made recently made by credit ratings agencies and other bodies, saying it could undermine financial stability in the region.
I see these statements from some governments in Eastern Europe as self-serving and an every-man-for-himself action which can only divide Europe as it seeks to deal with this crisis.
Ultimately, everyone is looking to Germany here. The Germans have deep pockets and are the largest EU member. For weeks, much speculation has centred on whether the Germans would bail out another eurozone member in trouble. Now, we see they just may. How this plays out with the German politicians’ domestic constituency gearing up for national elections is another story.