The European Union would act to help a government in the 16-member euro zone if it ran into financing trouble, an EU official said Tuesday.
Joaquin Alumina, the EU's monetary affairs commissioner, said the bloc had a solution for euro-zone countries at risk of defaulting on their debt, but he wouldn't say what it was. By definition, this type of thing should not be explained in public, he said. He did say the EU solution would come before a country was reduced to seeking last-resort aid from the International Monetary Fund.
Deteriorating conditions in some euro-zone members including Portugal, Greece and Ireland have pushed yields on those countries' bonds well above historical levels as investors rate them as a greater risk of default. Mr. Almunia's spokeswoman described a default as unlikely.
When you read between the lines, the statement implies that help would not be forthcoming for European Union countries which currently do not use the euro, such as those in Eastern Europe. At a Sunday summit, EU leaders led by German Chancellor Angela Merkel dismissed a call by Hungary for a regional bailout of Eastern Europe and instead suggested that any needed aid should come through the IMF or other multilateral bodies.
Asset markets in Eastern Europe’s emerging economies have been hit hard after the European Union gave a cold shoulder to those hoping for some kind of bailout package for these overextended economies. Currencies in Hungary, Poland and other countries have dropped sharply, with the Hungarian forint down 3% against the euro Monday and the Polish zloty also off about 3%. On the year, the euro has gained 17% and 16%, respectively, against those two currencies, but the appreciation by the dollar has been greater — nearly 30% and 28%, respectively.
The ECB opposes changing the criteria for euro adoption to put Eastern European countries on a faster track to join the common currency. Hungary and Poland in particular have been pressing for quick entry into the common-currency bloc, viewing it as a haven in the economic downturn.
The ECB is concerned that a currency linked prematurely to the euro could suffer a speculative attack by traders. That, in turn, could destabilize the euro.
The ECB is also concerned about Poland's hopes for speedy entry into the exchange-rate band. Poland's government wants to enter the ERM2 by June, in a bid to adopt the euro by 2012. The program would require that Poland keep its currency, the zloty, within a band of 15% either side of a particular euro peg.
Defending the peg could be problematic for the central bank, which would need to sell reserves in order to prop up the currency's value if it came under attack by traders. Once Poland entered the program, speculators might pummel the currency to try to test the ECB's willingness to defend that peg. That could force the ECB to prop up the currency by selling euro’s.