Germany refuses to rush into rescue fund increase

GERMANY has refused to be rushed into boosting the eurozone’s rescue fund after Moody’s cut Spain’s credit rating yesterday and markets piled pressure on Portugal.

The euro fell to a one-week low as the risk premium on Spanish bonds widened and the cost of insuring Spanish, Greek and Portuguese debt against default rose as a fresh wave of eurozone jitters hit financial markets.

Leaders of the 17-nation currency area are expected to back a watered-down version of a German-French plan to boost economic competitiveness at today’s Brussels summit but are unlikely to overcome sharp differences over the size and scope of the rescue fund.

A German official lowered any expectation of a breakthrough, saying that no decisions would be taken on strengthening the European Financial Stability Facility. “The German government does not believe it is the right time to discuss this,” he said.

The question of raising the fund’s lending capacity would be decided at the end of March, he said, and Berlin opposed giving the EFSF or its successor any role in buying troubled states’ bonds on the secondary market.

Moody’s Investors Service cut Spain’s sovereign debt rating one notch to Aa2 and warned of further downgrades, estimating that restructuring savings banks will cost more than double the government’s €20 billion-forecast.

Moody’s said it “believes there is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government’s current projections”.

It said the overall cost was likely to be nearer €40bn-€50bn and in a more stressed scenario, recapitalisation needs could even rise to around €110-€120bn.

Bond market pressure on Portugal to become the third eurozone state to seek an EU/IMF rescue after Greece and Ireland has risen this week with 10-year bond yields at euro lifetime highs above 7.5%, a level Lisbon says is unsustainable.

French sources said eurozone leaders would discuss Portugal’s measures to cope with its financial problems at today’s summit but they were not working on a rescue plan.