Euro Bloc Considers Aid To Weaker Members

Speculation has been swirling all week that Germany and perhaps other big European countries could come to the aid of euro bloc countries.

Economically strong euro zone countries have begun considering ways to shore up weaker member states for the first time in the decade-old history of the single currency bloc, Germany said on Friday.

Speculation has been swirling all week that Germany and perhaps other big European countries could come to the aid of euro bloc countries like Ireland or Greece, which have seen their finances sharply deteriorate during the global crisis.

On Friday, ahead of a weekend summit of European G20 countries in Berlin, German Foreign Minister and Vice Chancellor Frank-Walter Steinmeier confirmed such deliberations had begun, although he and other officials said no concrete plans existed.

"Especially an economy like the German one obviously relies on the economy of its neighbouring states and neighbouring markets not suffering too much," said Steinmeier, a Social Democrat who will challenge Chancellor Angela Merkel in a federal election in September.

"That's why a process is now starting to consider to what extent support via ... the economically strong countries of the euro zone countries can happen. This is a process that has just started, and of which cannot yet be said to what extent measures can be taken," Steinmeier added.

His comments came against the backdrop of a widening in euro zone bond yield spreads -- reflecting a divergence in the financial situation of nations in the currency bloc.

Many have issued vast amounts of debt to stimulate their economies in the face of a withering financial crisis and are now being forced to pay hefty premiums over stronger bloc members to finance that debt.

The cost of credit protection, or insuring against a sovereign default in the bloc, has also soared.

The troubles of some euro zone members and rising concerns about the financial stability of some EU countries in eastern Europe could overshadow the Sunday summit hosted by Merkel.

The meeting -- attended by the leaders of Britain, France, Italy, Spain, the Netherlands, Czech Republic and Luxembourg, as well as top European central bankers -- was called so that Europe could develop a common stance on overhauling global financial rules before a G20 summit in London on April 2.

BERLIN SUMMIT

On Friday, senior German officials were at pains to play down the issue of euro-zone woes and put the focus back on the summit, which will look at 47 reform pledges made by G20 countries at their first meeting in Washington last November.

The officials said they expected agreement at the meeting on strengthening the roles of the International Monetary Fund and Financial Stability Forum in overseeing financial reforms. Strengthening bank capital requirements during good economic times will also be on the agenda.

The Germans said they would push hard to ensure G20 countries follow through on a pledge that no markets, market players and instruments escape supervision in the future, although they cited differences with Britain on how strictly to regulate hedge funds. They also intend to send a strong signal of support for free trade.

But economic tensions within the European Union are sure to play an important role on Sunday.

German magazine Der Spiegel reported on Friday, without citing its sources, that the German finance ministry was studying the possibility of credit-worthy euro countries issuing a "bilateral bond" on behalf of another state in need.

It said a second option was for solvent countries together to issue a joint bond. Yet another step under consideration was an EU rescue package which could either be a stand-alone measure or organised with the International Monetary Fund.

The finance ministry denied in a statement that it was working on any such steps.

Talk of help for weaker euro states was first raised by German Finance Minister Peer Steinbrueck in a speech on Monday in which he said all members of the euro bloc would have to help "if it came to a serious situation" with one member.

In the same speech he mentioned Ireland as being in a "very difficult situation". Other euro zone countries like Greece have also seen their bond spreads widen, reflecting worries about rising budget deficits.

France's European Affairs Minister Bruno Le Maire welcomed Steinbrueck's comments on Friday and said he too hoped EU state would rally around partners in the bloc that ran into financial difficulty.

"All euro zone countries are still able to pay their bills. Nevertheless, a further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries," ING economist Carsten Brzeski said in a research note.

"Right now, markets are especially looking at Greece and Ireland but future attention could also move towards Portugal, Spain and Italy."