Brussels talks fail to conclude on support mechanism
Brussels – Eurozone finance ministers failed to make any headway in meetings held on Monday and Tuesday in regard to setting up a permanent debt support mechanism, even thought there are just 40 days until the spring EU summit.
The effect is already starting to show on bond markets, particularly in relation to periphery debt.
The reason that there has been no progress is obvious: German Chancellor Angela Merkel has clearly indicated that there will be no European Stability Mechanism (ESM) nor a boost to the budget of the European Financial Stability Facility (EFSF), if eurozone countries do not accept proposals to increase their competitiveness.
An inability by Europeans to move as fast as investors would like them to is expected to shake markets in coming weeks. The first country to feel the pressure will be Portugal.
Delays in decision making are also expected to have an impact on Greece, which will have to wait for a comprehensive solution to help the country get on top of its debt pile.
It has already been agreed upon that the loan period provided to Greece will be extended to 11 years and that the decision will be formally announced at the upcoming summit on March 24-25.
The second piece of good news that Athens can reasonably expect to see is a reduction to the cost of loans it has already received.
Apart from Ireland, the European Commission is also pressuring to reduce the cost of finance for Dublin and Athens to a more reasonable rate than current levels.
A reduction in the cost of lending will help both countries service their debt needs and send a message to markets that debt levels are sustainable.
Negative reactions to a reduction in the cost of finance are numerous but the reasoning behind the argument makes sense. The most difficult goal for Greece to attain is to getting the fund to to buy government bonds on the primary or secondary market, putting downward pressure on finance costs and allowing for better access to the market.
