Portugal succeeds in the sale of bonds in the middle of the pressure of rescue

The Portugal is under pressure to follow the Ireland and the Greece and accept a rescue. Photo: AP

The country has managed to sell 650 m € for bonds due in 2014 and 599 million euros of bonds in 2020.

Performance or price investors Portugal load hanging on its debt, debt short term was 5 396pc higher than 4pc investors look for in a binding October sale.

However the Portugal performance closely-watched 10 year bond was slightly lower at 6 716pc today compared to 6 806pc in a November auction.

The Portugal government debt agency said demand for bonds, claiming that he could sell more than double the €1 billion - value it offered.

The yield of bonds to 10 years in the Portugal was negotiated under FP7 autour these days, a cost of borrowing that some economists consider too high for the country to support.

Portugal faces a split between its political leaders, who insist the country does not require an EU rescue plan and the Monetary Fund International (IMF) to deal with its budget deficit, and help members of the Portuguese Central Bank supporting financial acceptor.

Leader of the Portugal Jose Socrates, says his Government has delivered on the promises of the EU, cutting the deficit of the budget less than 7 3pc 2010 goal.

"Portugal pas will require financial assistance for the simple reason that it is not necessary," he said yesterday.

Japan gave boost nations euro yesterday, saying it would buy bonds issued by financial assistance from EU funds to help restore stability in the region.

EU leaders are working on a "comprehensive" plan to contain the spread of the soveriegn debt crisis, European Commissioner Olli Rehn has written in the Financial Times today.

"Our most urgent priority is to break the vicious circle of unsustainable debt, financial turmoil and growth sub-optimal", he said.

He also called for the European Rescue Fund of €440bn "strengthened and broadened the scope of its activity.

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Portugal goes to debt markets as the pressure increases for a rescue plan

The Portugal is under pressure to follow the Ireland and the Greece and accept a rescue. Photo: AP

Yesterday, the country faced a split between its political leaders, who insist the country does not require an EU rescue plan and the Monetary Fund International (IMF) to deal with its budget deficit, and help members of the Portuguese Central Bank supporting financial acceptor.

Investors await the results of the sale auction this morning of €1 billion (£ billion) of Portuguese bonds 2014 and 2020, which indicates how investors will charge take the debt of the country.

Japan gave boost nations euro yesterday, saying it would buy bonds issued by financial assistance from EU funds to help restore stability in the region.

Leader of the Portugal Jose Socrates, says his Government has delivered on the promises of the EU, cutting the deficit of the budget less than 7 3pc 2010 goal.

"Portugal pas will require financial assistance for the simple reason that it is not necessary," he said yesterday.

EU leaders are working on a "comprehensive" plan to contain the spread of the soveriegn debt crisis, European Commissioner Olli Rehn has written in the Financial Times today.

"Our most urgent priority is to break the vicious circle of unsustainable debt, financial turmoil and growth sub-optimal", he said.

He also called for the European Rescue Fund of €440bn "strengthened and broadened the scope of its activity.

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Pressure on the ECB grows as Mario Monti rides to rescue

The "halo effect" of Mr Monti helped bring Italian bond yields back from the brink of a catastrophic spiral on Friday but the gains are likely to be tested again as the new team faces the stark reality of Italy's fractured politics.

"The ECB must make it clear that it will not allow Italy's bond yields to rise above 5pc, however much it costs," said Thomas Mayer, chief economist at Deutsche Bank.

He described the current policy of half-hearted bond purchases as "a recipe for failure", signalling to markets that the ECB is not willing to see the job through with overwhelming force.

Britain's Business Secretary, Vince Cable, echoed the calls for bolder action, blaming the ECB's passive stand for the dramatic escalation of the crisis last week that pushed Italy's €1.8 trillion to brink of meltdown and spread contagion to France.

"The central bank has to have unlimited powers to intervene to support economies, and indeed banks, to prevent collapse," he told the BBC.

"It's very clear that in addition to the disciplines that the southern Europeans are going to have to adopt, the Germans are going to have to play their role in supporting the eurozone. That's either directly or through the central bank, making absolutely sure that the big countries that are subject to speculative attack are properly supported with adequate liquidity."

The EU's €440bn rescue fund (EFSF) is supposed to take the baton from the ECB so it can step back, but the fund is not yet ready and is itself struggling to raise money at a viable cost.

The replacement of Mr Berlusconi with a credible leader committed to the deep reforms demanded by the EU makes it much easier for the ECB to justify help for Italy, but it is far from clear that the bank is willing to give Mr Monti a "dowry" of lower borrowing costs to lighten his task.

Jens Weidmann, head of Germany's Bundesbank and a pivotal ECB governor, has further dug in his heels against any extension of bond purchases.

"We have a mandate and we have to stick to our mandate. Fixing an interest rate for a country is certainly not compatible with our mandate," he said over the weekend.

"The eurosystem must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions."

Investors are betting on a torrid relief rally across global asset markets this week on hopes that new leaders in Italy and Greece will at least break weeks of deadlock, but it is already clear that politics will remain messy.

Mr Berlusconi warned that his People of Liberty Party intends to exercise a de facto veto in Italy's Senate, maintaining its grip on power behind the scenes.

"We are ready to pull the plug," Mr Berlusconi allegedly told supporters. He aims to block any form a wealth tax or bank account levy.

Mr Monti faces a difficult task, forced to work with shifting alliances and bitterly opposed parties on one issue at a time.

"We won't give you a blank cheque," said Umberto Bossi from the Northern League.

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Stockmarkets bounce as Germany backs sovereign debt rescue policies

 The court's double-edged ruling closes the door on joint-debt issuance in the eurozone or any move towards fiscal union under current treaty law Photo: EPA

Stockmarkets bounced amid relief that the nightmare scenario of a bail-out ban had been averted. However, the court said that there could be no further eurozone rescues without the prior backing of the Bundestag, greatly limiting the ability of any German Chancellor to strike EU deals.

"This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank cheque authorising further rescue measures," said the court's president, Andreas Vosskuhle.

The ruling saw European shares soar and bond spreads narrow. The FTSE 100 enjoyed its best performance since May 2010, rising 161.75, or 3.1pc, to 5318.59. Greek stocks climbed an eye-watering 8pc, while in Germany the Dax closed up 3.7pc and France's CAC-40 finished 3.6pc higher. The Dow Jones rose more than 2pc to 11371.53 in mid-afternoon trading.

The iTraxx Crossover index or "fear gauge" for credit risk plunged 35 basis points to 729, though it remains near record highs. Spot gold dropped sharply, down $91 to $1,804, on greater risk appetite.

George Soros, writing in the New York Times ahead of the court decision, warned that the eurozone "crisis has the potential to be a lot worse than Lehman Brothers".

The court's double-edged ruling closes the door on joint-debt issuance in the eurozone or any move towards fiscal union under current treaty law. "It is a clear rejection of eurobonds," said Otto Fricke, finance spokesman for the Free Democrats (FDP) in Germany's governing coalition.

Chancellor Angela Merkel said the ruling validated her rescue policies, and once again vowed to do whatever it takes to ensure the survival of monetary union.

"History has shown that countries with a common currency never wage war against one another, and that is why the euro is far more than just a currency. If the euro fails, Europe fails. It must not fail, and will not fail," she said in an emotional speech.

The judges said the EU's nexus of bail-outs and rescue machinery are allowable under Germany's constitution because they do not entail "automatic" transfers that might undermine German fiscal sovereignty.

However, they stressed that parliament's power to tax and spend is the foundation of German democracy and must not be eroded. The decision gives veto powers to the Bundestag's budget committee, dominated by the Christian Democrats and the FDP.

Finland, the Netherlands and Slovakia are all eyeing variants of this legislative brake, raising further questions about the workability of the eurozone's bail-out fund.

Concern about such moves increased on Wednesday after Ireland's finance minister, Michael Noonan, warned that the eurozone's bail-out fund was too small and complained that progress to implement changes agreed in July to expand its size was "slow". The warning came as the IMF downgraded Ireland's growth forecast for 2011 from 0.6pc to 0.4pc.

Those views were echoed by UK leader David Cameron and EU President Herman Van Rompuy who met to discuss issues facing Europe. A Downing Street spokesman said the two agreed that the "immediate priority is to implement" the July agreements.

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Euro area bonds "creep" to the top on the uncertainty of rescue

The leaders of the 17 countries in the euro area met in Brussels to agree to the economy of the Greece plans to reaffirm, announcing that the Fund currency International and Member nations would provide €109bn rescue, while private banks would add an additional $ 50 billion €.

But the inclusion of the private sector is the Greece at the risk of default and details of exactly how the rescue plan would work were not clear enough to convince investors. Adding to the uncertainty was the decision by the rating agency Moody's this morning to downgrade Greek debt to Ca - as a rating above by default.

Thus the European bond yields shot upward today. UK links pink 3pc, with the Italy and the Spain being charged FP6, Portugal 10 2pc, Ireland 11 (5pc) and the Greece of more than ten years almost 14pc.

Analysts claimed these rates, might continue to rising until concrete details are provided. Lyn Graham-Taylor, fixed the Rabobank income strategist, said that the agreement is one step larger until the market expected, but may fail unless details are made public.

"Finally people were referring to d - Word, by default.". Everyone realized this is going to happen, "he says.

But the uncertainty would cause yields to "continue to infiltrate more", he warned.

"If the details which are generally a kind of watering-down, expect, they will be, we will gradually see a risk-off gesture,"he added."". Until more concrete details emerge it y a "progressive higher sliding" in yields, because investors wary. "When you try and dig in where the 109bn is finally of, it is impossible", he said. "What money are they particularly of earlier rescue that is not yet distributed."

Details may be some time to come, even if, as Angela Merkel, said last week that the concrete plans would not be published until after the parliamentary summer recess - that could leave investors guessing until September.

There is also concern that the agreement could difficulty when she faces the German Parliament.

Michael Hewson, CMC Markets analyst, said: "in Europe the benefits in Germany began in new rescue last week for the Greece with a firestorm of critically come Angela Merkel in her apparent cellar in changes in the EFSF.".

"His former economic advisor and now head of the Bundesbank, Jens Weidmann, is one of many critics who accuse them of taking risks with the fiscal sovereignty of the Germany."

"With all changes to the EFSF requiring approval of the Parliament, Brussels agreement last week looks as if she might well have the easy bit as changes are beginning to be debated in parliaments of the EU."

"Thus, gold prices have emerged in Asia hit New Records investors seeking a safe haven far fears of a possible default and an almost certain ratings us credit downgrade, if the events continue in their ordinary sense.".

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EU rescue costs start to threaten Germany itself

 Chancellor Angela Merkel would risk popular fury if she had to raise fresh funds for eurozone debtors at a time of welfare cuts in Germany. 

Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."

The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.

While Germany's public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.

Reports that EU officials are hatching plans to double the size of EU's €440bn (£373bn) rescue mechanism have inevitably caused outrage in Germany. Brussels has denied the claims, but the story has refused to die precisely because markets know the European Financial Stability Facility (EFSF) cannot cope with the all too possible event of a triple bail-out for Ireland, Portugal and Spain.

EU leaders hoped this moment would never come when they launched their "shock and awe" fund last May. The pledge alone was supposed to be enough. But EU proposals in late October for creditor "haircuts" have set off capital flight, or a "buyers' strike" in the words of Klaus Regling, head of the EFSF.

Those at the coal-face of the bond markets are certain Portugal will need a rescue. Spain is in danger as yields on 10-year bonds punch to a post-EMU record of 5.2pc.

Axel Weber, Bundesbank chief, seemed to concede this week that Portugal and Spain would need bail-outs when he said that EMU governments may have to put up more money to bolster the fund. "€750bn should be enough. If not, we could increase it. The governments will do what is necessary," he said.

Whether governments will, in fact, write a fresh cheque is open to question. Chancellor Angela Merkel would risk popular fury if she had to raise fresh funds for eurozone debtors at a time of welfare cuts in Germany. She faces a string of regional elections where her Christian Democrats are struggling.

Mr Weber rowed back on Thursday saying that a "worst-case scenario" of triple bail-outs would require a €140bn top-up for the fund. This assurance is unlikely to soothe investors already wondering how Italy could avoid contagion in such circumstances.

"Italy is in a lot of pain," said Stefano di Domizio, from Lombard Street Research. "Bond yields have been going up 10 basis points a day and spreads are now the highest since the launch of EMU. We're talking about €2 trillion of debt so Rome has to tap the market often, and that is the problem."

The great question is at what point Germany concludes that it cannot bear the mounting burden any longer. "I am worried that Germany's authorities are slowly losing sight of the European common good," said Jean-Claude Juncker, chair of Eurogroup finance ministers.

Europe's fate may be decided soon by the German constitutional court as it rules on a clutch of cases challenging the legality of the Greek bail-out, the EFSF machinery, and ECB bond purchases.

"There has been a clear violation of the law and no judge can ignore that," said Prof Hankel, a co-author of one of the complaints. "I am convinced the court will forbid future payments."

If he is right – we may learn in February – the EU debt crisis will take a dramatic new turn.

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France and Germany veto increase in EU rescue fund

Jose Barroso, head of the European Commission, called on EU leaders to boost the firepower of the EU's €440bn (£366bn) bail-out fund and beef up its role, allowing it to intervene with pre-emptive bond purchases to help states under threat.

"It is important for the markets to know that Eurozone leaders are committed to do whatever is necessary," he said, hoping for action as soon as early February.

He also proposed a "new phase of European integration" with far-reaching oversight of the budgets, pensions, labour markets, and trade flows of EU states to prevent a recurrence of the imbalances that led to the EMU debt crisis.

Mr Barroso said the fund boost was a "precautionary" move, not directed at any one country. The gambit is risky since it may be taken by investors as a sign that Brussels fears imminent contagion to Spain, deemed too big for the current fund.

The response in Paris and Berlin was chilly. "We think the fund is big enough," said Francois Baroin, France's budget minister. German Chancellor Angela Merkel said the bail-out mechanism was "nowhere near exhaustion", adding curtly that she did not wish to debate the matter "any further".

Mrs Merkel is wary of attempts by Brussels to bounce her country into an EU debt union, or 'Transferunion' as it is described luridly by Germany's press. Such moves may breach the German constitution.

The dispute overshadowed a well-covered auction of €1.25bn of Portuguese debt, including 10-year bonds at 6.72pc, back below the 7pc danger line. The sale set off a surge in bank stocks in Lisbon, and was greeted with relief across the EMU perihpery. Spain's Ibex index jumped 5.3pc.

"The auction was a success from all angles," said Portugal's premier, Jose Socrates. "We do not need help: we can solve our own problems."

Gaven Nolan from Markit said purchases of Portuguese debt by the European Central Bank over the last two days had created good mood music but he doubted whether the bond sale would quell talk of a bailout.

"It didn't in the case of Ireland – which was fully funded for months ahead at the time of its bailout – and is unlikely to do so in the case of Portugal. The auction might have bought Portugal some time: it won't divert attention away from low growth prospects," he said.

The interest costs remain crippling for an economy facing contraction of 1.3pc next year, and scant recovery in 2012. The debt trajectory is precarious. The budget deficit will beat the target of 7.3pc of GDP in 2011, but only by use of pension transfers from Portugal Telecom.

Mark Ostwald from Monument Securities said confusion over the EU bail-out fund is a reminder of EMU's political limits. "We have gone nowhere since the show of unity in December. 'Mr Market' is still saying to EU leaders that they must come up with a mechanism to transfer money from the rich core to the periphery. We are no closer to that," he said.

Charles Dumas at Lombard Street Research said Germany faces an impossible demand. "If the German people go along with plans to prop up the economies of Club Med to save the euro, it means that they will have to pay subsidies for the next decade or two that significantly exceed what they have had to pay for German reunification," he said.

Separately, EU officials have floated proposals for a bank tax to fund the EU's permanent bail-out fund from 2013 onwards. An EU source said member states are "very cautious" about such an intrusion into fiscal sovereignty.

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Irish bank flight quickens despite EU rescue

Irish central bank data showed losses of €40bn (£34bn) in deposits from the key banks in December, compared with €27bn a month earlier. Over the past year Irish lenders have haemorrhaged €110bn, equal to 60pc of gross national product. "Would I want to leave money in an institution where I don't know who is making the rules?" said Gary Jenkins from Evolution Securities.

On Wednesday, Standard & Poor's cut Ireland's sovereign rating one notch to A-, citing a "weaker economic outlook, reduced prospects for bank earnings and funding difficulties of domestic banks". It also downgraded Bank of Ireland, Allied Irish, Anglo Irish and Irish Life, questioning "both the ability and willingness of the Irish government" to keep propping up lenders. The quartet remain "highly reliant on central bank funding" and have been unable to raise market funds despite state guarantees.

Investors are watching warily as Ireland prepares for an election on February 25. Leading opposition party Fine Gael said it will unpick parts of the EU-IMF bail-out for Ireland, threatening to "impose losses on bondholders who lent to collapsed domestic banks".

"Those who lent recklessly as well as those who borrowed recklessly should share the burden," said Michael Noonan, the party's finance chief. He exhorted the EU to cut the interest rate on rescue loans from 5.8pc to levels nearer the EU's borrowing cost of 2.6pc

Fine Gael is likely to form a coalition with Ireland's Labour Party, which is even tougher on creditors. All major parties are losing votes to Gerry Adam's Sinn Fein as it taps popular fury with calls for the IMF "to go home and take their money with them".

It is unclear whether EU leaders will agree on changes to the size and scope of €440bn bail-out fund (EFSF) this week. German officials say they will prevent the fund carrying out "soft debt restructuring" for Greece and other stricken states by lending them money to buy back their own bonds cheaply on the open market.

Yet, German and EU officials are working quietly on a formula that would allow the EFSF to lend its full headline figure of €440bn rather than just €250bn under current rules needed to anchor its AAA rating. This is easier said than done. It might compel Italy, Belgium, Spain and other non-AAA states to put up more money they can ill-afford. Critics in the City already view the EFSF bonds as akin to "CDOs", of sub-prime infamy. Any tinkering with the mechanism would be watched with a jaundiced eye.

Diplomats say Germany is dragging its feet on the EFSF in to extract concessions from debtor states on budgets, labour rules and pension reform. What Berlin means by a "eurozone economic government" is not a debt union or fiscal transfers but a mechanism for enforcing discipline. This treads on very sensitive sovereign toes in Rome, Madrid or even Paris.

Chancellor Angela Merkel's coalition faces regional elections in coming weeks and fears that the German people will baulk at further loan packages unless spendthrift states are seen to suffer hairshirt treatment.

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Irish bank flight quickens despite EU rescue

Irish central bank data showed losses of €40bn (£34bn) in deposits from the key banks in December, compared with €27bn a month earlier. Over the past year Irish lenders have haemorrhaged €110bn, equal to 60pc of gross national product. "Would I want to leave money in an institution where I don't know who is making the rules?" said Gary Jenkins from Evolution Securities.

On Wednesday, Standard & Poor's cut Ireland's sovereign rating one notch to A-, citing a "weaker economic outlook, reduced prospects for bank earnings and funding difficulties of domestic banks". It also downgraded Bank of Ireland, Allied Irish, Anglo Irish and Irish Life, questioning "both the ability and willingness of the Irish government" to keep propping up lenders. The quartet remain "highly reliant on central bank funding" and have been unable to raise market funds despite state guarantees.

Investors are watching warily as Ireland prepares for an election on February 25. Leading opposition party Fine Gael said it will unpick parts of the EU-IMF bail-out for Ireland, threatening to "impose losses on bondholders who lent to collapsed domestic banks".

"Those who lent recklessly as well as those who borrowed recklessly should share the burden," said Michael Noonan, the party's finance chief. He exhorted the EU to cut the interest rate on rescue loans from 5.8pc to levels nearer the EU's borrowing cost of 2.6pc

Fine Gael is likely to form a coalition with Ireland's Labour Party, which is even tougher on creditors. All major parties are losing votes to Gerry Adam's Sinn Fein as it taps popular fury with calls for the IMF "to go home and take their money with them".

It is unclear whether EU leaders will agree on changes to the size and scope of €440bn bail-out fund (EFSF) this week. German officials say they will prevent the fund carrying out "soft debt restructuring" for Greece and other stricken states by lending them money to buy back their own bonds cheaply on the open market.

Yet, German and EU officials are working quietly on a formula that would allow the EFSF to lend its full headline figure of €440bn rather than just €250bn under current rules needed to anchor its AAA rating. This is easier said than done. It might compel Italy, Belgium, Spain and other non-AAA states to put up more money they can ill-afford. Critics in the City already view the EFSF bonds as akin to "CDOs", of sub-prime infamy. Any tinkering with the mechanism would be watched with a jaundiced eye.

Diplomats say Germany is dragging its feet on the EFSF in to extract concessions from debtor states on budgets, labour rules and pension reform. What Berlin means by a "eurozone economic government" is not a debt union or fiscal transfers but a mechanism for enforcing discipline. This treads on very sensitive sovereign toes in Rome, Madrid or even Paris.

Chancellor Angela Merkel's coalition faces regional elections in coming weeks and fears that the German people will baulk at further loan packages unless spendthrift states are seen to suffer hairshirt treatment.

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Spain tempts fate with minimalist bank rescue

Elena Salgado, the Spanish Economy Minister, said the country's savings banks have seven months to boost capital through private investors or the state will partially take them over. 

Finance minister Elena Salgado said capital injections into the cajas would “in no way exceed €20bn [£17bn]”, with a large part coming from the private sector. Spanish banks will have to boost their core Tier 1 capital ratio to 8pc, even stricter than the Basel III rules.

“This is unlikely to be a game-changer, and could potentially unwind the relief rally we have seen in the markets,” said Silvio Peruzzo, RBS’s Europe economist.

“We view €50bn as the minimum recapitalisation for the Spanish banking system that would restore investors’ confidence,” said the bank.

RBS said Spain remains caught in a vice of tightening fiscal policy and a deepening property slump that may culminate in a 40pc fall in house prices, eroding the solvency of the cajas. The Madrid consultants RR de Acuna estimate the overhang of unsold homes at 1.2m.

Mr Peruzzo called on EU leaders to take much bolder action to overcome the crisis, demonstrating that they really mean to “save Spain” by beefing up the rescue machinery. EU ministers played for time at a key meeting last week, giving an impression of complacency.

A report by RBS said the real firepower of the EU’s €440bn bail-out fund must be greatly increased to cope with the risk of a full-blown Iberian crisis. The fund should be allowed to buy Spanish and other eurozone bonds pre-emptively, and recapitalise banks.

EU leaders are starting to recognise that the sort of loan packages provided to Greece and Ireland are no answer to a solvency crisis caused by excess debt, but have not yet agreed to a formula that allows these economies to claw their way back to health.

RBS said there is a risk that new proposals in the pipeline will not be “forceful enough” to mark a turning point in the eurozone drama. It said Spain “will remain exposed to contagion”, unless the EU takes pre-emptive action.

Goldman Sachs takes a rosier view, deeming Spain to be fundamentally “solvent”. It estimates further caja losses at €15bn. Even if Spain slips into a double-dip recession this year under a “pessimistic scenario”, public debt will peak below 90pc of GDP. Exports are recovering, with car shipments at record highs.

Analysts are split over the true state of the cajas. Arturo de Frias at Evolution Securities said parts of Spain’s banking system look “Irish”. The “problem ratio” on €439bn of property debt may reach 60pc. “We calculate a worst case of €142bn future impairments – €59bn for banks, and €83bn for the Cajas,” he said.

Brussels clearly fears that Spain is still at risk. Olli Rehn, the EU’s economics commissioner, called for urgent action to beef up the rescue fund (EFSF) before the next spasm of debt jitters. “We need to agree as quickly as possible. The recent lull in market tensions gives us breathing room, but we can’t sit back: we must act now with full determination,” he told Die Welt.

Mr Rehn said EU leaders must redesign the bail-out fund so that it can lend a full €440bn. “If you buy a Mercedes with 440 horsepower, you want all 440 horsepower,” he said.

The EFSF has a lending limit near €250bn owing to the need for extra collateral to anchor its AAA rating. EU experts are exploring ways to boost the total without needing fresh money from member states, which would entail a Bundestag vote at a bad moment before regional elections.

They have support from German finance minister Wolfgang Schauble, who said the EU cannot keep “stumbling from one crisis to the next”. But the Free Democrats (FDP) and Bavaria’s Social Christians are still dragging their feet within the ruling coalition.

Guido Westerwelle, the FDP leader, has sounded euro sceptic over recent weeks, accusing EU officials of trying to bounce Germany into signing a blank cheque for a “Transferunion”, arguably in breach of both German and EU treaty law. He admonished EU officials for their “ex-cathedra” demands, reminding them that the rescue fund remains the prerogative of the member states that pay for it.

“It bothers me that some in Europe seem to think nothing has happened in this financial crisis, and think they can solve the problem by taking on fresh debt,” he said, invoking the name of Ludwig Erhard, the free-market apostle who created the foundations of the post-war German miracle.

Jean-Claude Juncker, head of the Eurogroup, said the FDP’s new tone is alarming. “I am appalled by how some German liberals are compromising their European political heritage. It is deeply painful for me to see that some in the FDP are now flirting with a populist course regarding Europe,” he told Spiegel.

Mr Juncker said icily that Germany was not the only country in Europe with a AAA-rating and is not the only contributor to the EU bail-outs. “We could criticise the Greeks, Portuguese and others more credibly if Germany and France hadn’t violated the Stability Pact on purpose in 2003,” he said.

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