Fabian Demicoli

Governments bungling bailout communication

Euro zone governments have bungled the way they are presenting their work on a future bailout mechanism, stoking tensions in financial markets, said Business Leaders in Europe. Last month's summit of EU leaders was a communication failure that spooked investors and must not be repeated when the bloc's leaders meet next in mid-December.

 

Financial markets were unsure what to make of the October summit's statement, which said very generally that private investors would be involved in the euro zone's future, permanent economic crisis mechanism for countries facing financial problems.

The current bailout mechanism, valid until 2013, does not involve any "haircuts", or asset value reductions, for holders of government bonds. But analysts said uncertainty over the crisis mechanism has prompted many investors to dump the bonds of fringe euro zone countries, exacerbating Ireland's economic problems and forcing it to seek EU aid.

Economists and political analysts have also been critical of how EU leaders and some officials have handled communications during the debt crisis, saying this ineptitude in some cases has worsened the situation.  Germany's call in early November for asset value reductions for private bond holders in a future euro zone rescue mechanism prompted a selloff of Irish and Portuguese debt.

European leaders later said any implementation of such a mechanism would not come until 2013. But in a sign that the issue remains far from settled, Spanish economy minister Elana Salgado said that 2013 was too early to start involving private sector creditors in euro zone crisis mechanisms.

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