Veritas – The hottest week-end of the euro break-up saga

During one of the most torrid week-ends of the year in the eurozone, the political debate over the future of the single currency has been as hot as ever.

At the same time in which the European Central Bank was reported to be ready to commit to potentially unlimited government bond purchases, Greece was back in the spotlight as a major threat to the survival of the euro.

The troubled country is expected to ask for an extension on the deadline to meet its fiscal targets, confirmed by the visit of Antonio Samaras, Greek prime minister, to both Germany and France to negotiate the implementation of the austerity plan.

Recent reports suggested that the country’s funding gap for the next two years increased to €14bn.

Even if official data will be released when auditors from the Troika composed of the European Commission, European Central Bank (ECB) and International Monetary Fund will publish a report in mid-September, a number of officials acknowledged that the debate on the country’s future in the currency is far from over.

Most eurozone members are still assessing the consequences of a Greek exit from the monetary zone, and officials are less and less reluctant to disclose to the press about their progress.

Finland Foreign Minister Erkki Tuomioja said that the country has contingency plans for a possible break-up of the euro which includes the calculation of the cost of such scenario for the country.

Jörg Asmussen, German executive board member at the European Central Bank, said euro-area members would be able to manage a Greek exit from the eurozone, despite the sever side effects of this scenario.

The attitude was shared by German Finance Minister Wolfgang Schaeuble, who said on August 18 that the eurozone crisis cannot become a bottomless pit for his country. He added that there are limits to aids that can be granted to Greece.

The week-end debate was heated up by a report by German Der Spiegel, which suggested that the ECB is considering to buy sovereign debt of the most troubled countries whenever interest rates exceed a certain spread to German bunds.

The initiative, to be discussed during next meeting of the Governing Council in early September, would discourage speculators from pushing yields above the level decided.

The plan would be in line with what suggested by ECB’s president Mario Draghi during a press conference at the beginning of August.

The central bank of the eurozone has been working for some time on a plan to intervene in the secondary market to lower yields in countries that ask Europe’s bailout fund, and the plan could be almost ready to be put in action.

Even if Spanish and Italian 10-year bond yields fell to the lowest in more than six weeks today after the report by the German magazine, the initiative will not be approved without compromises on the extent of the programme.

“The Bundesbank holds to the opinion that government bond purchases by the Eurosystem are to be seen critically and entail significant stability risks,” said today the German central bank in its monthly report.

The negotiation over the details of the plan could keep temperatures in the eurozone high even when the summer will be over.

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