Telegraph 19 Febbraio 2009

Germany has acknowledged for the first time that it may have to rescue eurozone states in acute difficulties, marking a radical shift in policy by the anchor nation of Europe's monetary union.

Finance minister Peer Steinbruck said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.

"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart.

The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs.

However, it is clearly Ireland that is now in the eye of the storm as Dublin struggles to prevent the budget deficit spiralling up to 12pc or even 13pc of GDP as the economy contracts. Fears are mounting that Ireland may not be able to cover the massive liabilities of its banking system.

The Maastricht Treaty prohibits eurozone bail-outs by EU bodies but Article 100.2 allows for aid to countries facing "exceptional occurrences beyond its control". The European Investment Bank is already providing aid by steering project finance to regions in distress. This could be expanded subtly into short-term help.

Ultimately, the European Central Bank could purchase bonds from vulnerable countries in the open market. That would amount to a full monetary bail-out, and the de facto creation of an EU debt union. Such proposals have been anathema to Germany in the past.

By Ambrose Evans-Pritchard

Source >  Telegraph | Feb 17