Britannia Radio

EU  OBSERVER            27.2.08
1. Germany may bail out troubled eurozone states
    ANDREW WILLIS

German chancellor Angela Merkel has given the strongest signal to  
date that her country may come to the rescue of embattled eurozone  
economies.
"We have shown solidarity and that will remain so. We should use  
Sunday's summit [in Brussels] for member states affected to give an  
honest report of their situation," she said on Thursday evening (26  
February) at a press conference in Berlin.

"We will have to discuss the situation in each individual country. It  
all depends on whether we are able to speak openly and honestly about  
the situation because there are a lot of rumours flying around."

Certain conditions are likely to be attached to any support plan  
offered by Berlin.

While Ms Merkel refused to be drawn on the exact nature of financial  
support, she made it clear that action to tackle excessive budget  
deficits would be a stipulation for receiving aid.

She indicated such action could be carried out under Article 100 of  
the Maastricht Treaty that allows financial assistance to be given to  
countries experiencing "difficulties caused by natural disasters or  
exceptional occurrences beyond its control."

"Of course there is a certain interpretative room to manoeuvre in the  
stability and growth pact and a country like Ireland that has been  
hit quite hard by the banking crisis is clearly in a different  
situation to a country like Slovakia with fewer banks," said Ms Merkel.

German officials hinted support for Ireland could be dependent on the  
country increasing its low corporate tax reports the Irish Times, an  
issue that Germany has complained about in the past.  [The Irish  
government will find the ‘strings attached’ unpalatable but ‘beggars  
can’\t be choosers’ ,  The Telegraph today reports on life in Ireland  
today with empty bars and restaurants as those who can  flood across  
the border to Northern Ireland - happier being free of the euro -  
where grocery prices are 49% cheaper and Jameson’s Whiskey is  the  
equivalent of 20 euros in  Newry and 38 in DUblin.   -cs]

The fight for funding
Many EU countries have signaled that they will run large budget  
deficits this year and competition on the money markets to raise  
capital is already acute.

Germany, seen as the safest EU economy by investors, has twice failed  
this year to raise all the capital it was seeking when auctioning 10- 
year bonds.
Ireland on the other hand was forced to issue three-year bonds this  
week at nearly 2.5 percentage points over equivalent German bonds.  
Before the credit crisis, Irish bonds traded at about the same level  
as German bonds.

The credit shortage raises the prospect that one or more eurozone  
countries may be forced to default on current debt repayments and  
seek help from Germany or the IMF.

"The first will certainly be a small country, so that can be managed  
by the bigger countries or the IMF," former Bundesbank president Karl  
Otto Poehl said on Thursday in a further indication of possible  
German action.

Germany has ruled out the possibility of a common "eurobond" for  
eurozone members, as it would increase the cost of German borrowing.  
Likewise, central and eastern non-eurozone states fear such a move  
would reduce market demand for their bonds.

The tough situation faced by many central and eastern European states  
is likely to feature heavily on the agenda of Sunday's extraordinary  
summit of European leaders.

Currencies in the region have fallen heavily this week over fears  
western European banks are pulling out funds and speculation that the  
global recession may prompt a sovereign default by one or more states.

Both Hungarian and Polish prime ministers this week pushed for a  
speedy entrance to the relative safe-haven of the eurozone.

On Thursday, three large development banks announced they will offer  
€24.5 billion in financing to struggling banks in the region. The  
move by the World Bank, the European Bank for Reconstruction and  
Development and the European Investment Bank is aimed to kick-start  
ailing cash flows in the region.

Latvia's Prime Minister-designate Valdis Dombrovskis, warned on his  
first day on the job on Thursday that the Baltic state could run out  
of money by the summer.
=============
2. Nordic leaders sceptical about eurobonds
    LEIGH PHILLIPS

  BLAA LONID - As the debate over the issuance of eurozone-level  
bonds heats up, Nordic prime ministers are lukewarm on the idea, with  
Sweden saying there are "better answers" to deal with the problem of  
spreads in the cost of borrowing across the union.

"[The EU] should try other things," Swedish prime minister Fredrik  
Reinfeldt told reporters on Thursday (26 February) after a meeting in  
Iceland of the Nordic Council of Ministers - which brings together  
the premiers of Denmark, Finland, Sweden, Iceland and Norway - on  
Wednesday (26 February).

"There was a co-ordinated answer to the crisis decided [by the  
European Council] last autumn, many of which measures are still not  
in place," he continued. "That should be the road forward. When these  
measures are in place thoroughly, that will open up credit markets."

Mr Reinfeldt added that public funds used to stabilise western  
European banks are not only there to aid the "mother banks, but also  
the daughter banks" in eastern Europe.

"That is also sending a message of stability, especially in the  
Baltics in the Swedish case."

The issuance of "eurobonds," would see the sale of bonds guaranteed  
by all 16 members of the single currency group, instead of just  
individual governments.

The new instrument has been suggested as a way to finance aid to  
eastern European EU states. But it would also help troubled eurozone  
members, such as Greece, Ireland, Italy, Portugal and Spain, borrow  
money more cheaply.
At the same time, it could make the cost of borrowing go up for the  
11 EU states outside the circle, which comprise mostly eastern  
European countries, but also the UK, Sweden and Denmark.

The move has the support of Italy, Luxembourg and the International  
Monetary Fund. But Germany has repeatedly criticised the idea,  
knowing that as the largest eurozone economy it might have to pay out  
in the event of any sovereign default.

Poland this week vowed to do "everything" it can to prevent the  
creation of eurobonds, saying it aims to pull together a coalition of  
eastern European countries, the Netherlands and Nordic states ahead  
of this Sunday's informal EU summit in Brussels.

The Nordic members of the EU - Finland (which is in the eurozone),  
Sweden and Denmark (which are not) - said in Iceland on Wednesday  
that they have not been approached by eastern European states to join  
an anti-eurobond group.

But Finnish leader Matti Vanhanen told this website he has doubts if  
the EU treaty would allow the debt issuance.
"I'm a little sceptical that this can even happen. We have to check  
with our legal experts," he said.

Danish prime minister Anders Fogh Rasmussen said the EU should show  
some "flexibility" toward the plan, but also voiced concerns about  
the implications of the eurobond proposal.

"I still think that we should not water down national responsibility  
in financing public debt," he said. "It is essential that each  
government feel responsibility for sound economic policies, including  
how to finance public deficits."

"Maybe this national responsibility could be combined with the  
issuance of EU bonds, but the bond spreads can also be seen as an  
honest indicator from the markets, a red signal, showing the way for  
governments."
=========================
TELEGRAPH            27.2.09
Debt markets take fright at 'EU bond'
The capital markets have become increasingly uneasy over proposals to  
use the European Investment Bank as an all-purpose fireman to prop up  
weaker regions of the eurozone or come to the rescue of Eastern Europe.

    By Ambrose Evans-Pritchard

The borrowing cost on the EIB's 10-year bonds has risen to 90 basis  
points above the benchmark German Bunds. The yield is now closer to  
the borrowing costs of Spain and even Italy, suggesting that  
investors already suspect the bank will be used to issue "EU bonds"  
for rescue purposes – whatever its original mandate.

The EIB, the world's biggest multilateral lender, was able to borrow  
for years at rates that were almost the same as the German government  
– or even lower – enabling the entire EU to take advantage of the  
Germany's credit-rating for project finance. The change has been abrupt.

The bank said this week that yields had been pushed up by the  
avalanche of sovereign bond supply as governments around the world  
tap investors for $3 trillion (£2.1 trillion) of fresh money. But EIB  
debt has been hit surprisingly hard.

Among the plans rattling the bond markets is a proposal by Centre for  
European Policy Studies in Brussels to convert the EIB into a vast  
stability fund to shore up European banks and prevent the crisis in  
the ex-Soviet bloc from mushrooming out of control.

Daniel Gros, the group's director and an influential figure in EU  
circles, said EIB borrowing should be "massively" increased. "With a  
gearing of 4:1, the EIB could expand its loan portfolio up to €1  
trillion (£890bn). It could triple its activities without any  
additional capital increase," he said.

Michael Klawitter, a currency strategist at Dresdner Kleinwort in  
Frankfurt, said enthusiasts for such plans are up against the ever  
attentive bond vigilantes. "This idea is never going to fly. The  
yields on EIB bonds could rise above the average cost of borrowing  
for the member states," he said. This may in fact be happening.

The EIB is already a powerful – if little-known – arm of EU economic  
policy. Its mandate is to provide co-finance for projects that  
"further EU objectives". In the past this has meant anything from  
fish farms to airports and high-tech ventures. It uses its AAA credit  
rating to access cheap capital on the global bond markets, just like  
the World Bank.

Much to the unease of its own officials in Luxembourg, the EIB is  
already being asked to take on an ever-greater role in Europe's  
rescue programmes. EU leaders agreed to beef up its capital by €67bn  
to €232bn in December. Lending is to rise by 30pc to over €60bn this  
year with extra spending on green vehicles – which some say is a  
disguised bail-out for the car industry – as well as energy projects  
and small businesses.

The Maastricht Treaty forbids any direct rescue of eurozone states by  
the European Central Bank. There is no treaty mechanism for the sort  
of "EU bond" proposed by Italy's finance minister Giulio Tremonti,  
but the EIB could take on the role quite easily with a tweak to its  
mandate and little creativity by EU lawyers.

Phillipe Maystadt, the EIB's president, played down talk this week  
that the bank was being pushed into galloping mission-creep. "What we  
can do is provide finance as intensely and rapidly as possible for  
investment. That's what we're doing and we aim to do more, better and  
faster," he told Reuters.

Marc Ostwald, a bond expert at Monument Securities, said the EIB has  
been a major casualty of state guarantees for bank debt. "There has  
been a massive repricing. Why buy EIB debt if you can get a  
government guarantee on the banks?" he said.
=========================
[In this posting I had hoped to include a scary piece about the  
imminent collapse of Hungary’s economy but with the normal ‘user- 
unfriendliness ‘of the Telegraph’s website I cannot find it nor have  
time to type it out in full.  But a summary follows -cs]

FROM  TELEGRAPH -  26.2.09  summary.
HUNGARY FACES RUIN ON THE BACK OF FOREIGN CURRENCY BORROWING BINGE
The great success story of post soviet economocs is on the brink.
Hungary is teetering on the edge of bankruptcy with its citizens  
struggling to pay foreign currency mortgages and personal loans taken  
out during one of the post-Communist era’s exuberant booms [during  
which] Forint interest rates stayed stubbornly high so lower rate  
loans in Swiss francs and Euros proved hard to ignore.   --- 60% of  
mortgages and car loans are denominated in foreign currencies.

In one frenzied month(Oct ‘07) 93% of all lending was in foreign  
currencies.

Debtors are desperate as even after losing their properties they and  
their children remain liable for the debt.

After the fall of the Berlin Wall Hungary attracted much foreign  
investment especially into property and car manufacture. Both markets  
have collapsed this year.  Unemployment is soaring.

The IMF has offered help and the Swiss government too.  Hungary is  
‘demanding’ an EU €150 billion fund to bail out central and eastern  
Europe and warns that a Hungarian collapse would sweep across its  
borders ‘far beyond the Danube’.