E.U. Leaders Still Disagree as Crisis Simmers

German chancellor may weaken on joint bonds; Nordic banks downgraded, U.K. slumps

Chancellor Angela Merkel of Germany. (Photo: AP) Chancellor Angela Merkel of Germany. (Photo: AP)

As leaders in the European Union still dither over what, if anything, to do to keep Greece in the euro zone, Chancellor Angela Merkel of Germany met with resistance at home to her austerity-only position even as Prime Minister Mario Monti of Italy gave a different account of Wednesday’s summit meeting than was offered by the Luxembourg prime minister, Jean-Claude Juncker.

Spain looked to the European Central Bank (ECB) for help, and more bad news came in the form of downgrades for some of the largest Nordic banks and a deeper slump in the U.K.

Bloomberg reported Friday that Monti and Juncker offered differing versions of the informal Wednesday summit, with the former saying he could bring Merkel around to consider joint euro bonds for the “common good” while the latter said such bonds “didn’t find much support,” particularly among German-speaking countries, although French-speaking countries were more favorably disposed toward them.

Regardless of how the summit went, Merkel went home to find additional arguments in favor of growth rather than austerity at a meeting in Berlin on Thursday. The opposition parties got her to agree to reconsider a separate proposal on common liability for sovereign debt. Additional discussions on the proposal will be held on June 13.

Mariano Rajoy, prime minister of Spain, had spoken out at the Wednesday meeting seeking additional bond buying from the ECB, Bloomberg reported. He has repeatedly said that Spain will not seek a bailout, but he called upon the ECB to do more to bring down the cost of borrowing in euro zone countries struggling with debt.

Not only Spain but also Ireland, Italy and of course Greece are paying high rates on bonds, and Rajoy called for relief, saying, “If public debt isn’t sustainable, we have a problem. I insist it is up to the ECB to take this decision that it has already taken in the past.”

However, the ECB is resisting, with its president, Mario Draghi, instead calling for “a brave leap” on the part of eurozone governments to achieve greater integration. Without that, Draghi said, any measures the ECB takes will only be temporary.

“The non-standard measures implemented by the ECB helped us gain time,” he said in the report. “But we have now reached a point where the process of European integration needs a brave leap of political imagination.”

News elsewhere was also far from cheery. In the U.K., Thursday numbers revealed that the country was sinking deeper into recession. After a week of economic reports in a similar vein, pressure has increased on Prime Minister David Cameron to embark on measures to stimulate growth. His opposition blames the austerity policies he and his party put in place for the downturn in the British economy.

Voters are turning against Cameron even as his spokesman characterized the present economic climate as “the worst financial and debt crisis of our lifetime.” Regional elections earlier in the month took a heavy toll on Cameron’s Conservatives and the Liberal Democrats who are their coalition partners.

Patrick Dunleavy, a professor of politics and the London School of Economics, was quoted saying, “Cameron is coming under pressure because his strategy isn’t working.”

Meanwhile, Moody’s downgraded several Nordic banks, despite their having some of the best ratings in Europe, saying that their reliance on wholesale funding has exposed them to volatility. In separate statements, the ratings agency lowered Nordea Bank AB and Svenska Handelsbanken AB of Sweden by one level to Aa3, and Norway’s DNB Bank ASA by one to A1. SEB AB and Swedbank AB retained their current ratings and Landshypotek AB saw its grade fall by two levels to Baa2.

Moody’s took the action on the Swedish banks, it said, because of their “comparatively high reliance on wholesale funding, which Moody’s regards as less reliable under a severe stress scenario.” Still, it continued, “Moody’s acknowledges the relatively good capital markets access for most Swedish banks despite difficult market conditions in recent years.”

It cited other factors in its decision as “modest profitability” and risks to asset quality. Its statement added, “Moody’s recognizes that the Swedish economy has so far performed well compared with other European Union economies, and Swedish banks have been able to attract market funding on economic terms from international investors. Furthermore, Swedish banks have strengthened their capitalization since 2008.”

However, ratings firms’ credibility has suffered of late. The Nordic countries have responded by largely dismissing the ratings changes, with Goran Bronner, CEO of Swedbank, saying that Moody’s is “backward looking.” He told Swedish banks not to pay too much attention. In Denmark, banks have gone further, with some firing Moody’s after being told by large Danish investors that such ratings have limited value.

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