Global Finance Chiefs Attack Europe’s Debt Response

Los Cabos, Mexico. The heads of the world’s leading economic institutions warned on Sunday that Europe’s muddled response to its debt crisis had rattled rather than reassured debt markets.

Addressing business leaders on the eve of the G20 summit in Mexico, World Bank head Robert Zoellick cited last week’s “wasted” 100 billion euro ($125 billion) bailout of Spanish banks as an example of Europe’s institutional shortcomings.

And the head of the Organization for Economic Cooperation and Development, Angel Gurria, urged Europe to “take down the scaffolding” still clinging to its systems of governance and to deploy “awesome firepower” to cow the markets.

“Look, everyone knows this meeting is coming at an absolutely critical time — and we’re waiting for Europe to tell us what it is going to do,” Zoellick said at a panel in the B20 business summit, held in parallel to the G20 meet.

“Markets can manage risks that they’re well aware of. The danger we’re creating is that the pattern of policy-making is increasing uncertainty and making markets more nervous, which has a negative feedback,” he said.

“To take your Spanish example — it’s actually 100 billion euros, and to have that as being a negative story? It’s amazing. Why was it? It is because the delivery was extremely poor,” Zoellick said.

Euro zone powers agreed last week to provide a bailout loan of up to 100 billion euros to salvage Spain’s stricken banks, but the deal failed to quell the intensifying storm on the debt market.

The head of the International Monetary Fund, Christine Lagarde, told the same panel that, while Madrid is not under IMF supervision, the institution is monitoring the situation and would be “honest and candid” in its advice.

Zoellick, with support from Gurria, warned that markets are confused by the roles played by Europe’s various stability mechanisms and by its central bank.

“People did not know whether it was the EFSF or the EFSM. What is the subordination?” he said, referring to the European Financial Stabilization Facility and the European Financial Stablization Mechanism.

“So they took a very big bullet and they wasted it,” Zoellick said.

All 17 members of the euro zone use to enjoy generously low interest rates on government debt, as traders assumed their governments shared responsibility for maintaining fiscal stability within the currency bloc.

But since the onset of the sovereign debt crisis in 2009, the weaker states on the periphery of Europe such as Ireland, Portugal and most critically Greece saw soaring bond yields compared to powerhouses like Germany.

Germany has resisted calls to mutualize European debt through issuing joint eurobonds, but the euro zone partners have set up a series of structures to head off the crisis by providing a “firewall” of bailout funds.

Gurria, however, argued that the key to halting the crisis was to deploy the resources of the European Central Bank, a move that has been fiercely opposed by Germany and would breach current European rules.

“The ECB can help stabilize the bond market and the ECB really is the bazooka,” he said, noting that the bank had already effectively provided a trillion euros over a month to cope with the crisis.

“The problem is if you go into your championship bout, into the ring with one hand tied behind your back, you have a pretty fair shot at losing,” he said, calling on Brussels to make its institutions “more operational.”

“Europeans have to display the awesome firepower that is at their disposal, and they have to transmit the message that they’re willing to use the awesome firepower,” he said.

“Europe has the capacity to keep on with it. Europe has the capacity to remove the scaffolding.”

The leaders of the world’s biggest developed and emerging economies are to meet for two days from Monday, as the G20 group of powers, in the Mexican resort town of Los Cabos.

Agence France-Presse