21 December 2011
BRUSSELS - The euro zone debt crisis is set to spread and deepen next year, European Central Bank (ECB) president Mario Draghi has warned, as Britain refused to contribute to the latest International Monetary Fund (IMF) bailout fund for distressed states.
A European Union proposal to plough e200 billion (S$340 billion) into the IMF to enable it to bail out regional countries in trouble floundered after UK Chancellor George Osborne told his fellow European finance ministers on Monday that Britain would not contribute its e25 billion share.
Germany had earlier offered Britain an olive branch, with its Foreign Minister Guido Westerwelle insisting that Europe did not have a secret plan to undermine the City of London. In the event, Brussels announced that only e150 billion had been pledged for the IMF package, well short of target.
Mr Draghi told the European Parliament's economic committee late on Monday that pressure in the bond markets in the first quarter would be "really very, very significant, if not unprecedented" as hundreds of billions of euros in debt come up for renewal.
He warned that e230 billion of bank bonds, e300 billion of sovereign bonds and more than e200 billion of collateralised debt obligations will all become due in the first three months of next year.
The ECB president said he had "no doubt whatever about the strength of the euro, its permanence, its irreversibility" but he reiterated his view that the central bank had no role to play in buying up sovereign bonds on a long-term and enhanced basis.
In its semi-annual Financial Stability Review, the ECB said tensions in the region had now reached the "systemic crisis proportions" seen at the time of the Lehman Brothers collapse in 2008 - partly because of the failure of politicians to act in time. The central bank warned that contagion from the debt crisis could afflict other euro zone countries and spread across the globe.
At press time yesterday, world stock markets were mixed in holiday-thinned trade while the euro was up 0.5 per cent at US$1.3064 (S$1.70).
Sentiment was helped by data that showed German business sentiment rose sharply in December, underscoring the strength of Europe's biggest economy despite the regional crisis. The Munich-based IFO think-tank's business climate index, based on a monthly survey of 7,000 companies, rose to 107.2 this month from 106.6 last month.
On another positive note, yields on short-term Spanish debt plunged in an auction yesterday, with analysts saying that banks were waiting to tap into the ECB's first-ever three-year offer of unlimited liquidity today for the carry trade.
Spain sold e3.7 billion of three-month paper at 1.735 per cent, sharply below an average yield of 5.11 per cent last month. It sold e1.9 billion of six-month paper at a yield of 2.435 per cent, down from 5.227 per cent.
Meanwhile, Sweden's central bank lowered its main interest rate by a quarter of a percentage point to 1.75 per cent, the first cut since 2009 as the region's debt woes sapped growth in the largest Nordic economy. AGENCIES
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