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Germany’s Bundesbank said a permanent European state-rescue mechanism must ensure that private holders of sovereign debt share the cost of any restructuring.
“A transparent procedure that guarantees an extensive and credible consolidation and reform program could, along with improved financial-market regulation, considerably reduce the risk of a systemic crisis,” the Frankfurt-based central bank said in its monthly report today. “In this context, private creditors also have an indispensable responsibility when it comes to restoring sustainable public finances in over-indebted nations.”
Bonds from Ireland to Portugal have dropped since European Union leaders agreed on Oct. 29 to consider German Chancellor Angela Merkel’s proposal for a permanent rescue mechanism as of 2013 that would involve private bondholders sharing the burden of future bailouts. The proposal is part of European leaders’ efforts to replace the temporary rescue fund created in May after Greece’s near-default.
The Bundesbank, led by Axel Weber, said it welcomes “the recognition of the fundamental exclusion of liability of the EU or its member states for other nations’ debt.”
“Over the past weeks, concerns on financial markets about the sustainability of public finances in periphery countries of the currency union have again massively increased,” it said. “Without the urgently needed measures to restore investor confidence, the economic outlook will remain damped for a considerable time in the countries concerned.”
In Germany, Europe’s largest economy, the recovery should broaden over the coming months as faster hiring encourages consumer demand, the central bank said. Domestic “growth drivers are increasingly gaining strength and the economy should continue to benefit from export demand.”