Almunia Says EU Has Solution for Euro State in Crisis

By Meera Louis

March 3 (Bloomberg) -- European Union Monetary Affairs Commissioner Joaquin Almunia said EU policy makers have “a solution” for any euro-area country in crisis before a government would have to seek International Monetary Fund aid.

“If the crisis emerges in one euro-area country, there is a solution,” Almunia said at a conference in Brussels today. “There is a solution before visiting the IMF.” He declined to give details.

Growing deficits and debt burdens amid the deepening recession have pushed the risk premiums on some euro-area members’ bonds to all-time highs, prompting concerns that investors may shun the securities of some countries and spark a region-wide crisis. Wider bond spreads and record costs for debt- default insurance in Spain, Portugal, Ireland and Greece raised the specter of national bankruptcies.

While few investors are forecasting any defaults, the mere risk may prompt the region’s richest economies to announce their willingness to help a smaller member in trouble. Spain lost its AAA rating at Standard & Poor’s in January, and ratings for Greece and Portugal also were cut. Moody’s Investors Service lowered the outlook on Ireland’s rating to “negative,” increasing the chance the nation’s top grade would be reduced.

German Finance Minister Peer Steinbrueck said last month that some of the 16 nations using the euro are “getting into difficulties” and may need help. Budget deficits have ballooned as governments across the continent pour billions into stimulus measures to fight the worst recession since World War II. France today said its 2009 deficit will top 5 percent of output as tax revenue shrinks and spending surges amid the recession.

‘No Indication’

Almunia’s spokeswoman, Amelia Torres, today called it “unlikely” that a euro-area country would face financing difficulties necessitating a rescue. “There is no indication whatsoever that this situation is arising,” Torres told a regular press briefing in Brussels.

The differential between what investors charge to hold Spanish, Greek and Portuguese debt and the rate on comparable German bonds has increased this year to the widest since those countries joined the euro region, and the price of insuring Irish debt against default rose to a record. The European Commission, the EU regulator, has called on governments to curb their widening deficits as soon as possible after the economic crisis.

Almunia wouldn’t give details of any rescue plan, saying “it’s not clever to talk in public about this solution, but the solution exists.” EU officials “are equipped intellectually, politically and economically to face this crisis scenario,” the commissioner said.

‘Downside Risks’

He said “downside risks” for the European economy have increased in recent weeks. The commission in January forecast a 1.9 percent contraction in the euro region this year, which would be the deepest recession since the single currency’s introduction a decade ago. Since then, economic sentiment has fallen to an all-time low and the manufacturing industry contracted at a record pace in February as companies scaled back production.

“The worst point of the crisis, of the recession, is not yet behind us,” Almunia said later at a meeting at the European Parliament. “Probably we are living now these months the worst” part of the crisis, “a period of high uncertainty with a lot of risks,” he said.

“I hope that in a few months we can consider that the worst of a recession is behind us,” Almunia said. “We are considering the beginning of next year a gradual recovery can start.”

The IMF may cut its forecast for the global economy to predict a contraction this year, an IMF official said yesterday. The fund on Jan. 28 forecast 0.5 percent expansion worldwide and a 2 percent contraction in the euro area.

“The IMF is likely to move its global growth forecast down further, probably into negative territory,” said Nicolas Eyzaguirre, director of the IMF’s western hemisphere department, said in notes for a speech in Porto, Portugal.

To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net