EU leaders still divided over cure for euro crisis

EU leaders wrapped up a two-day summit in Brussels yesterday still struggling to bridge divisions over immediate steps to stabilise bond markets, and Moody's Investors Service kept any optimism measured by cutting Ireland's credit rating five levels.

Nevertheless, the euro rose against most of its major counterparts in response to the EU's move on Thursday to create a mechanism to contain future debt shocks.

German business confidence also climbed unexpectedly.

As the summit neared its conclusion, the EU weighed measures such as using the bloc's main rescue fund to buy bonds of financially distressed countries including Portugal and Spain.

Luxembourg's prime minister, Jean-Claude Juncker, said: "This will be taken under consideration in the next coming weeks."

For now, Germany ruled out topping up the current €750 billion (Dh3.66 trillion) emergency fund or using it more flexibly, reinforcing scepticism in markets about Europe's search for the right formula to quell the fiscal contagion that threatens the euro.

Carsten Brzeski, an economist in Brussels, said the future setup "is to some extent window-dressing as it does not solve the current crisis. European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013."

As the final session was under way, Moody's cut Ireland's credit rating five levels.

The ratings agency said: "The Irish government's financial strength could decline further if economic growth were to be weaker than currently projected or the cost of stabilising the banking system turn out to be higher than currently forecast."

In a departure from German insistence that each country determine its own fate, Angela Merkel, the German chancellor, said yesterday that maintaining national fiscal discipline would not by itself put the 16-nation euro region on a sounder footing.

"It is just as important that we move towards a common economic policy step by step," Mrs Merkel said. "It will be a long process."

Mrs Merkel was fresh from winning an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid "if indispensable" to underpin the euro and might force bondholders to bear some of the costs of future rescues.

EU officials said deliberations were under way over more flexible use of the main €440bn component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines similar to the €85bn package granted to Ireland on November 28.

Such steps would ease strains on the European Central Bank (ECB), which has bought €72bn of weaker countries' debt since May to stabilise markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to €10.76bn.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland's support package and triggering concern that Portugal and Spain will be next.

German business confidence unexpectedly rose to a record this month as stronger domestic demand helped bolster the recovery in Europe's largest economy, according to data published yesterday.

* with Bloomberg