EU leaders have agreed there must be a new bailout system for eurozone members in trouble, but there are fears it could make borrowing even more expensive for countries like Ireland.
All agreed the new permanent rescue system must involve just minimal changes to the EU treaties and so permit Ireland and other countries to avoid referenda.
The European Commission has been asked to come up with the new crisis mechanism to lend to countries like Greece that are not able to borrow from the markets because the price is too high.
Germany’s Chancellor Angela Merkel was adamant that banks and other private investors who hold government bonds must take part of the hit if a country needs an EU bailout.
“The burden must never again be borne by the taxpayers. Private institutions must be included,” she told journalists after the two-day summit.
But president of the European Central Bank Jean-Claude Trichet warned leaders to be cautious about how they approached this as it could be counter productive. He said that in the majority of cases of countries going bankrupt, the private sector was not involved.
EU officials also counselled that the crisis was not yet over, markets were still nervous and some member states were under very close scrutiny.
“You have to think now about the effects of what you are announcing on the possibility of refinancing. We have to find a mechanism that allows us to bring in private debt… but there will be tension between that and a negative impact on countries that need to refinance,” Mr Trichet said.
Officials said anybody tapping the current €750 billion EU-IMF fund would not incur haircuts on the private institutions such as banks that lent to that country.
The Commission will draw up the new crisis bailout system and, like the current one due to run out in 2013, it will involve the IMF but not funds from the European Commission. It will have strict conditions forcing receiving governments to adopt tough austerity measures.
Taoiseach Brian Cowen welcomed the decision to set up a new mechanism and said it would send a positive signal to the markets, but he would not address the issue of debt restructuring and having the institutional lenders receive less for their loans.
Asked about the continuing rise in the cost of borrowing for Ireland, he said: “We will take whatever steps are necessary.”
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