Debt sharing would be economically wrong, says Merkel

German chancellor Angela Merkel yesterday dashed any lingering hope in financial markets that Europe would issue common eurozone bonds to underpin its single currency after Spain formally sought a financial rescue.

The Spanish government applied for bailout loans to recapitalise banks laden with bad debts as the euro and shares fell due to investors’ scepticism that a two-day EU summit starting on Thursday will act decisively on the debt crisis.

Ms Merkel, who leads Europe’s biggest economy and the main contributor to its rescue funds, said sharing debt liability within the 17-nation eurozone would be “economically wrong and counterproductive”.

At the Brussels summit leaders will discuss a cross-border banking union, closer fiscal integration, and the possibility of a debt redemption fund as part of efforts to tackle a worsening debt crisis. France, Italy, and Spain have pushed hard for steps towards mutualising debts and liabilities through a joint bank deposit guarantee, a common bank resolution fund, and issuing common eurozone bonds.

The German leader adamantly rejects such ideas and is keen to squelch them before the meeting.

“When I think of the summit, I feel concerned that yet again we will have too much focus on all kinds of ways of sharing debt,” Ms Merkel said in Berlin.

Germany’s finance minister Wolfgang Schäuble hammered home this message in weekend interviews, saying that throwing more money at the crisis would not solve the problems, and telling Greece it must try harder rather than seeking to soften bailout terms.

“We have to fight the causes,” he told German TV network ZDF.

“Anyone who believes that money alone or bailouts or any other solutions, or monetary policy at the ECB — that will never resolve the problem. The causes have to be resolved.”

He said Ireland and Portugal were succeeding in their EU/IMF adjustment programmes and said that Greece had not made a sufficient effort.

Critics say that by refusing collective solutions, Berlin risks unleashing speculative attacks on Spanish and Italian bonds, hastening rescues the eurozone’s rescue funds are too small to manage.

Spanish economy minister Luis de Guindos asked for up to €100bn in a letter to eurogroup chairman Jean-Claude Juncker, saying the final amount of assistance would be set at a later stage.

The EU’s top economic official, Olli Rehn, said a deal on terms for the loan from Europe’s bailout funds could be concluded within weeks.

“The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state aid rules.”

The rescue, agreed on June 9, is intended to help Spanish lenders recover from the effects of a burst real estate bubble and a recession.

Prime minister Mariano Rajoy told business leaders he would soon take new measures to revive economic growth and create jobs.

He said the government remained committed to cutting the public deficit. Two independent audits last week put the Spanish banks’ capital needs in a severe economic downturn at up to €62bn.