5:15 AM
Markets tense as EU makes no move on debt crisis
Addison Ray
By Jan Strupczewski and William James
BRUSSELS/LONDON | Tue Dec 7, 2010 7:19am EST
BRUSSELS/LONDON (Reuters) - Tension persisted on European bond markets on Tuesday after Germany and fellow euro zone states resisted IMF calls to do more to quell the currency bloc's debt crisis, leaving the ball with a reluctant European Central Bank.
After five hours of talks on Monday, the 16 ministers said they would take no new measures to tackle the risk of contagion, arguing that the existing safety net was sufficient, and they had not even broached a proposal for issuing joint bonds.
"We don't have any new decision to announce to you," Jean-Claude Juncker, the chairman of the Eurogroup, told reporters after the talks.
The premium investors demand to hold the bonds of Portugal and Spain rose in response to the ministers' inaction. Traders said the ECB, which engineered a fall in both countries' borrowing costs last week by stepping up its purchases of government debt, stayed on the sidelines.
"Ministers left the ball with the ECB," said Carsten Brzeski, senior economist at ING in Brussels. "Currently, the ECB is buying time for politicians. However, the ECB will not want to remain the only crisis manager and is eager to play the ball back to politicians."
An ECB source, speaking on condition of anonymity, said the central bank did not want to take on all the risk of supporting euro zone debtors by massive bond-buying, and wanted governments to take additional measures such as increasing the rescue fund.
Luxembourg Finance Minister Luc Frieden summed up the ministers' approach, telling Reuters Insider television: "We have all the tools to make sure that despite the temporary turbulence, financial markets should understand that there is no major risk for the stability of the euro zone."
The European Financial Stability Facility (EFSF) has the capacity to issue bonds worth up to 440 billion euros to help out troubled euro zone member states, as part of an overall EU/IMF rescue fund of 750 billion euros ($1 trillion).
"My gut feeling is that spreads are going to carry on widening for a while yet," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.
"Anyone in the market who is expecting someone, somewhere to fund more support for the periphery, whether it be the EFSF or the ECB -- they're going to be disappointed."
INVESTORS ON EDGE
Investors remain on edge about the debt crisis spreading from Greece and Ireland, which have already been granted EU bailouts, to Portugal and possibly Spain.
All 27 European Union finance ministers formally endorsed an 85 billion euro EU/IMF assistance package for Ireland on Tuesday, clearing the way for the first loans to flow to Dublin once a tough austerity budget passes parliament.
The budget is expected to be approved later on Tuesday after a key independent lawmaker promised to vote for it, giving Prime Minister Brian Cowen a majority.
Before Monday's meeting, the IMF had urged the ministers to increase the size of the 750 billion euro bailout mechanism for debt-stricken states and suggested the ECB step up purchases of government bonds.
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