EU needs courage to make investors share risk: Merkel

25 Nov, 2010

German Chancellor Angela Merkel said on Wednesday European politicians needed the "courage" to make private investors share in the risk of future debt crises in the eurozone and show financial markets who is in charge. "Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" Merkel said in a speech to the German parliament.
"This is about the primacy of politics, this is about the limits of the markets," said the chancellor, acknowledging that her insistence on this issue was making markets "nervous". The centre-right German leader is blamed by some in Europe for provoking the recent Irish debt sell-off by saying private eurozone bondholders must be made to share the risk of future sovereign debt crises via a permanent euro crisis mechanism.
She sparked fresh selling of the euro on Tuesday by saying it was in an "exceptionally serious" situation. This prompted one European Central Bank policymaker, Ewald Nowotny, to voice irritation at Merkel for not "differentiating between the euro as a currency and the problems of individual (eurozone) states".
An Irish downgrade by Standard and Poor's pushed the Irish bond spread against safe-haven German debt even higher while the premium investors demand for holding debt in Portugal hit new highs as contagion fears grew. Merkel has repeatedly said private investors must be involved in a new eurozone crisis mechanism for the eurozone to take effect from mid-2013, when the current mechanism lapses.
A German government paper seen by Reuters, which Berlin wants to serve as the basis for discussion in Brussels, proposed that private investors should face "haircuts" or other debt payment restructuring measures. Berlin wants creditors like banks and financial investors to be drawn in by attaching collective action clauses (CACs) to all newly issued eurozone bonds from as early as 2011 in order to ensure a smooth transition to 2013.
The proposal will be discussed by EU leaders in mid-December but some leaders may be concerned that introducing such clauses so soon could unnerve bond markets even further. The new mechanism would succeed the European Financial Stability Facility (EFSF), a safety net created after Greece's debt crisis rocked the euro zone earlier this year. Merkel said she had a "positive" view on Ireland taking up this mechanism. She faced loud criticism for delaying an aid package for Greece while insisting on deeper austerity measures, finally agreeing to it days before signing up to the much bigger EFSF.

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