By Tony Czuczka and Meera Louis
March 8 (Bloomberg) — European leaders are in talks to establish a lender of last resort and limits on credit-default swaps to bolster the euro area and prevent a repeat of the Greek financial crisis.
Plans for what may become the European Monetary Fund and a German-French push to curb the use of derivatives to bet against sovereign debt are to be ready by June, officials in Berlin and Brussels said today. In Greece, tax and trash collectors walked out as a week of strikes to protest austerity measures began.
German Chancellor Angela Merkel and her European counterparts are shifting from rhetoric to regulation as they seek to defend the euro and rally behind coordinated measures. Greek Prime Minister George Papandreou said his country’s fiscal crisis could spread unless “unprincipled speculators” and “ill-regulated” financial markets are reined in.
“Our instruments are not sufficient,” Merkel told members of the foreign press association in Berlin today. “The European Union must be able to respond to the challenges of the moment.”
The yield on the two-year Greek note fell 8 basis points to 4.69 percent as of 4:30 p.m. in London, while the yield on the five-year bond dropped 16 basis points to 5.82 percent.
Merkel, French President Nicolas Sarkozy and Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro- area finance ministers, are working on proposals to limit the use of derivatives in light of the Greek fiscal crisis, Merkel’s spokesman, Ulrich Wilhelm, said in Berlin. Merkel is due to travel to Luxembourg tomorrow for talks with Juncker.
“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns,” Papandreou said in the text of a speech in Washington today. “An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”
Germany’s BaFin financial regulator said in a statement it had found “no evidence to date” that credit-default swaps have been used recently to speculate against Greek government bonds. Investors held CDSs on Greek bonds worth $85 billion, twice as much as a year ago, Spiegel magazine reported in this week’s edition, citing BaFin figures.
No ‘Massive Speculation’
While Bafin didn’t dispute the figures, it said the net volume of outstanding CDS contracts has been virtually unchanged since the middle of January, reflecting an absence of “massive speculation.”
The euro pared its earlier gains against the dollar after Papandreou’s comments. The euro traded little changed at $1.3619 at 11:52 a.m. in New York after earlier strengthening as much as 0.6 percent to $1.3705.
German Finance Minister Wolfgang Schaeuble suggested to yesterday’s Welt am Sonntag newspaper that a euro-region institution similar to the International Monetary Fund to avoid another Greek crisis.
The EU plans to propose a type of European Monetary Fund by the end of June, said Amadeu Altafaj, a spokesman for Economic and Monetary Affairs Commissioner Olli Rehn. The proposal is still at a preliminary stage, and Rehn will report on the discussions at a commission meeting tomorrow, Altafaj told reporters in Brussels.
‘Determination to Act’
“There is a clear sense of determination to act,” Altafaj said. Action is being considered on “the intervention side, but also on the pre-emptive,’ he said. “All contributions are welcome.”
Proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels. An EMF could ease disruption caused by the failure of a euro member to pay its bills by offering investors new EMF bonds in exchange for the defaulted securities, they said.
It’s “perfectly reasonable for Europeans to try to build an institution they need,” IMF Managing Director Dominique Strauss-Kahn said in an interview yesterday. A monetary fund that intervenes in euros would stand in contrast to the IMF, whose aid packages come in a currency that’s different than the borrower’s currency, he said.
European Central Bank Executive Board member Juergen Stark opposed the creation of an EMF.
“It would be the start of a European system for fiscal transfers that could be very expensive, give the wrong incentives and could hurt countries with more solid public finances,” Stark wrote in an article for German newspaper Handelsblatt. An ECB spokeswoman said he was expressing his own view.
Papandreou announced a package of tax increases and spending cuts on March 4 amounting to 4.8 billion euros ($6.5 billion). That helped the government to sell 5 billion euros of bonds the next day, signaling that its funding crisis has eased. Greece must redeem more than 20 billion euros in debt in April and May.
The Greek government has faced down public protests as it pledges to lop four percentage points this year off its budget deficit, which at 12.7 percent of gross domestic product is the EU’s biggest. Tax and garbage collectors are walking off the job as a week of strikes against the austerity measures gets under way.
Greece’s debt crisis is meanwhile spurring individual efforts by European nations including Germany, the area’s largest economy, to curb financial markets.
Schaeuble “believes we must learn from the crisis,” his spokesman, Michael Offer, told reporters in Berlin. Greece is “the trigger” for efforts to avoid similar crises in the future, he said.
Germany announced revised rules on short selling last week and wants Group of 20 leaders to discuss a levy on banks for a crisis fund when they next meet in Toronto in June, Offer said.
“The aim is twofold: to make banks pay for the crisis and prevent them from becoming too big to fail,” Merkel’s spokesman Wilhelm said. Reining in credit-default swaps is “a very complex topic,” he said. “What we need to do is make progress.”