Financial thoughts

Former Bundesbank President Karl Otto Poehl said smaller members of the euro region are more likely to default on their debt obligations and would probably be rescued by Germany or the International Monetary Fund.

“The first will certainly be a small country, so that can be managed by the bigger countries or the IMF,” he said in an interview with Sky News. “I think there are countries in Europe which are considering the possibility to leave the eurozone. But this is practically not possible. It would be very expensive.”

Poehl’s comments are the latest to suggest Germany’s economic establishment has become more willing to help rescue fellow members of the euro region facing bankruptcy. That marks a reversal from years in which German policy makers argued the Maastricht Treaty forbid bailouts and reflects growing concern that a default in one country would spark a region-wide crisis.

A deepening recession and bank bailouts are straining the budgets of some countries, sending bond spreads to records and prompting speculation among some investors that individual nations could leave.

The spread between Italian and German bond yields today widened to the largest since 1997. The spreads on Irish, Portuguese and Greek bonds are close to the widest since before they adopted the euro, which was created a decade ago.

Finance Minister Peer Steinbrueck heralded the shift in German thinking when he said last week that some euro nations are “getting into difficulties” and that Europe’s biggest economy would show its “ability to act.”

Surging Rates

Poehl, 79, said the high cost of leaving the euro region may help ensure its survival. He also said that one country’s departure doesn’t necessarily mean the bloc as a whole would crumble.

“In the case that a country would leave the eurozone, the foreign exchange rate would go down significantly — 50 or 60 percent,” said Poehl, Bundesbank president between 1980 and 1991 payday loans for bad credit. “Interest rates would go sky high as the markets would lose confidence in the system” and “in the countries that can’t maintain their membership.”

European Central Bank President Jean-Claude Trichet last week tried to ease concerns about the euro region’s fiscal health, saying Feb. 20 there is no “weak link” in the bloc.

“I consider that speaking of any particular country as a weak link in the euro area is an error of judgment,” he said. Trichet said today in Dublin Ireland’s economy faces “severe challenges.”

‘Catastrophe’

Not all German experts would back a bailout. Former ECB Chief Economist Otmar Issing told Frankfurt Allgemeine Zeitung last week that saving a profligate member would be “catastrophic” and undermine the monetary union framework. Current ECB Executive Board member Juergen Stark calls the no- bailout rule an “important pillar on which the European Union was founded.”

Former International Monetary Fund Chief Economist Kenneth Rogoff today predicted the default risk may rise once central banks start to raise borrowing costs from record lows.

“Interest rates will rise in two to three years and countries like Italy may face rates of 11 percent again — will they be able to pay?” he said in a speech near Reykjavik today. “I can well imagine that if we don’t have a large sovereign default, we will see some large sovereigns on the brink of it.”

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