France Pushes for Buybacks to Stem Financial Crisis in Split With Germany

France called for the use of bond buybacks to stem the European debt crisis, splitting with Germany on the eve of a summit meant to project a unified stance on quelling market turmoil.
France favors maximum flexibility for Europe’s 440 billion- euro ($606 billion) rescue fund, such as using it to enable debt-strapped countries to buy their own bonds at a discount, a French official told reporters in Paris today on condition of anonymity.
The fund “needs force and flexibility,” French Finance Minister Christine Lagarde said at a separate briefing. “That doesn’t necessarily mean increasing it. It needs to be efficient.”
German opposition to buybacks, which would pare the debt burden of countries like Greece, reflects the differences between the euro region’s two principal economic powers over how to stamp out the year-old fiscal crisis and put the euro on a sounder footing.
European leaders will review the crisis-fighting strategy at a summit tomorrow in Brussels, recommitting to a March 25 target to strengthen the bailout fund, set up a permanent rescue mechanism and enact new rules against budgetary bungling.
The euro and Spanish and Portuguese bonds slipped after Spain sold 3.5 billion euros of debt, below the maximum target set for the auction. The French-German tensions damped investor confidence that Europe is closing in on an anti-crisis formula.
‘Starting to Wonder’
“Markets have been betting very heavily on a resolution of the debt crisis in March,” said Marius Daheim, a senior fixed- income strategist at Bayerische Landesbank in Munich. “People are starting to wonder whether these expectations are warranted, or whether there might be scope for negative surprise that the EU does not deliver a straightforward solution.”
Germany, the biggest of the 17 euro nations, is tying its approval of a strengthened safety net to a toughening of controls on budget deficits that have gone unenforced since the euro’s debut in 1999.
While direct purchases of distressed countries’ bonds in the primary market will be part of the upgraded toolkit, other pieces -- such as Ireland’s plea for lower interest rates on aid -- have yet to fall into place.
Bond buying is “not a stupid idea,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels. “These are issues which are under discussion and debate and which have not been settled.”
EFSF Potential
France and Germany agree on the goal of extracting the full potential from the European Financial Stability Facility, who actual lending is limited by collateral rules to about 250 billion euros.
The European Central Bank, which has propped up markets by buying 76.5 billion euros of struggling countries’ bonds, is looking to hand over that job to governments as it pivots to its main mission of combating inflation.
Speaking in Frankfurt after the ECB left interest rates at a record low 1 percent, President Jean-Claude Trichet said the fund must “be as flexible as possible and also to be as effective as possible in terms of magnitude.”
To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net