Merkel buries euro bonds as summit tension rises

Tue Jun 26, 2012 6:39pm EDT
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By Thorsten Severin and Catherine Bremer

BERLIN/PARIS (Reuters) - German Chancellor Angela Merkel sought to bury once and for all the idea of common euro zone bonds on Tuesday, saying Europe would not share total debt liability "as long as I live", as the bloc's big four finance ministers met to narrow differences on how to solve a worsening debt crisis.

Two days before a crucial European Union summit, European Council President Herman Van Rompuy released a seven-page report on closer fiscal and banking union envisaging a euro zone treasury that would issue common debt in the medium term.

Merkel immediately stamped on the idea of mutualising debt - favored by France, Italy and Spain - at a meeting of lawmakers from her Free Democratic coalition partners in Berlin, according to people who attended the closed-door session.

"I don't see total debt liability as long as I live," she was quoted as saying, a day after branding the idea of euro bonds "economically wrong and counterproductive".

However Germany, the EU's biggest economy and paymaster, appeared ready to budge on using the euro zone's rescue funds more flexibly to help banks and reassure investors spooked by an increased risk of facing write-downs on government bonds.

The parties in Merkel's centre-right coalition proposed allowing a new permanent rescue fund, known as the European Stability Mechanism (ESM), to funnel aid directly to national bank rescue funds, according to a draft seen by Reuters.

That could spare governments like Spain's some of the political stigma of a bailout, although the loans would still be on the state's balance sheet, increasing its debt, and would still be subject to strict conditions.

More significantly, conservative floor leader Volker Kauder told another meeting of lawmakers that euro zone governments were discussing making it possible to remove preferred creditor status from the ESM rescue fund, participants said.   Continued...

(From L) Spanish Prime Minister Mariano Rajoy, French President Francois Hollande, Italian Prime Minister Mario Monti and German Chancellor Angela Merkel attend a meeting at the Villa Madama in Rome June 22, 2012. REUTERS/Lionel Bonaventure/Pool