Markets edgy after EU makes no new move on debt crisis

By @ibtimes on

Tension on European bond markets was undiminished on Tuesday after German and fellow euro zone states resisted IMF calls to do more to quell the currency bloc's debt crisis.

After a five-hour meeting on Monday, the 16 ministers said they would take no new measures to tackle the threat of contagion, arguing the existing emergency fund was sufficient and that a proposal for issuing pan-euro zone bonds had not even been broached.

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 high-debtors Portugal increased in response while Spain's stayed at a high level.

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 remain on edge about the debt crisis spreading from Greece and Ireland, which have already been granted EU bailouts, to Portugal and possibly Spain.

The expected passing of Ireland's tough austerity budget later on Tuesday may help underpin the market.

All 27 European Union finance ministers meet on Tuesday to discuss the EU economy but it would be highly unusual for them to come up with policy decisions after the Eurogroup of euro zone finance ministers did not.

Before Monday's meeting, the IMF had urged the ministers to increase the size of a 750 billion euro ($1 trillion) bailout mechanism for debt-stricken states and suggested the European Central Bank step up purchases of government bonds.

European Central Bank policymaker Juergen Stark, a renowned hawk, dismissed calls for the ECB to accelerate its bond buying program and also rejected the idea of a common European sovereign bond, which would bring down the borrowing costs of weaker nations, but raise those of Germany.

We are not at a bazaar here. 'Politicians make demands and the ECB jumps' -- Europe doesn't work like that, Stark was quoted as saying by Tuesday's Suddeutsche Zeitung newspaper.

Traders say the ECB has increased its purchasing of government bonds of struggling euro zone nations in recent days but not at a rate which will turn negative market sentiment.

EXPECTATIONS DASHED

There had been widespread expectation among investors that the euro zone might decide to take more radical steps, particularly after the IMF's intervention.

But German Chancellor Angela Merkel came out strongly against a bigger European Financial Stability Facility or the idea of issuing euro zone bonds on Monday, and other EU officials also dismissed the proposals.

I see no need at this time to increase the fund, Merkel told a news conference in Berlin. Only a very small percentage of it has been used.

Belgian Finance Minister Didier Reynders said on Tuesday that discussions would continue about the size of the EU's safety net, keeping alive the prospect of action before the year-end.

I am sure we will have more discussion in the next weeks about the size of such a (EU safety net) mechanism, he said.

EU leaders hold an end-of-year summit on December 16-17.

ECB policymaker Lorenzo Bini Smaghi also said European countries should be ready to increase the size of the rescue fund if more countries need aid.

The latest comments suggest (euro zone finance ministers) are far away from a compromise so we have to wait for the EU summit next week to get a flavor, said Nick Stamenkovic, an interest rate strategist at RIA Capital Markets.

Talks on Tuesday will be among all 27 EU finance ministers, with the debt crisis again expected to play a part in discussions, but other issues, such as the EU budget, closer economic coordination and Value Added Tax, on the agenda.

Olli Rehn, the European commissioner for monetary affairs, said on Monday the main thing was for Portugal and Spain to get their budgets in check and stave off the threat of contagion.

We commended Spain for its substantive reform program with actions on all fronts, fiscal, structural, financial, he said. As regards Portugal, we welcome the recently passed ambitious budget for 2011 and we expect that this step will be followed by the substantiation of consolidation measures to reach 4.6 percent fiscal deficit target for next year.

(Writing by Luke Baker and Mike Peacock; editing by Janet McBride)

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