Global impact of spiralling euro debt crisis

The leaders of Germany, France and Spain are to hold crisis talks about Europe's spiralling debt crisis today, as EU commissioner for economic and monetary affairs Ollie Rehn warned the current market turmoil would have a global impact.

Mr Rehn said markets had not reacted as "expected or hoped for" to the measures agreed by euro-area heads of state and government last month, but pledged that European leaders were doing was was necessary to implement the agreement "fully and as rapidly as possible".

"The spread of bond-market tensions across the euro area is, however, not justified by economic and budgetary fundamentals," he said.

"Economic recovery is proceeding in most parts of the euro area, while important steps in budgetary consolidation and structural reform are underway across Europe and in particular in those member states most exposed to market tensions."

He also reiterated today that private sector involvment in the second financing package for Greece would not be repeated for Ireland or Portugal.

Euro zone leaders agreed last month to lower the interest on loans to Greece and extend their maturity to 15-30 years.

Mr Rehn said lower interest on euro zone loans to Greece and private bondholder involvement in the country's restructuring would cut the country's debt by 22 per cent of GDP by 2020.

"A reduction of interest rates to about 4 percent should reduce cumulative interest payments by some €25 billion between 2011 and 2020," he said. "This implies a reduction in the debt ratio in 2020, without private sector involvement, of around 10 per cent of GDP," he said.

Mr Rehn said private sector involvement (PSI) in the financing package would bring the ratio down further by stretching the average maturity further, and substantially cut the amounts that Greece would have to raise in the markets by the end of the programme in 2014.

PSI and the accompanying debt buy-back entail a further estimated net debt reduction by some €26 billion or 12 per cent of GDP by 2020," he said.

Mr Rehn described the agreement reached on July 21st as "a milestone in our management of the sovereign-debt crisis" but acknowledged there had been difficulties in communicating the agreement to the markets.

"Such a comprehensive, detailed and technically complex agreement requires time to implement. But there were expectations in financial markets that all elements could be implemented immediately," he said. "While these expectations were clearly unrealistic, markets have nevertheless been disappointed."

Mr Rehn estimated that the technical and political processes should be finalised by early September.

The July 21st deal on the expansion of the European Financial Stability Facility (EFSF), the €440 billion rescue fund, has yet to be enacted in national parliaments.European Commission president José Manuel Barroso yesterday called for a rethink of the EFSF rescue mechanism that funds weak countries such as Ireland and may have to support Italy and Spain.

A spokeswoman for the Department of Finance said the relevant Irish legislation had been prioritised for passage through the Oireachtas in early September “in light of this week’s events and its impact on the euro zone area”.

Mr Rehn said the EFSF needed to be "credible and respected" by the markets.

Global stock markets regained some ground today after initially sinking for an eighth day after Wall Street recorded its worst day since the depths of the credit crisis three years ago. Positive payroll data from the US buoyed stocks around the world.

But Mr Rehn said the solution to the current turmoil would have to be global, as the crisis had a "global dimension and global repercussions".

"And that’s why international policy coordination through the G7 and G20 is of critical importance. Europe is playing and will continue to play its full role in this context," he said.

A divided ECB restarted its bond-purchase programme yesterday following a four-month hiatus. The central bank refused to extend the purchases to Italy and Spain, the two countries at the centre of the current turmoil.

Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. The ECB stopped short of buying Italian bonds, and ECB president Jean-Claude Trichet said Italy has to show it is "ahead of the curve" in taming its debt.

"Certainly the ECB is ready to make major efforts to relieve the situation, but first the countries have to take steps," ECB council member Luc Coene told RTBF radio in Brussels today.

"It doesn't make sense to pour water into a bucket with a hole in it."

World stock markets have lost more than $4.4 trillion since July 26th as speculation mounts that the global economy faces a new recession that would deepen Europe's debt woes.

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