EU Pushes to Solve Debt Woes

By Tony Czuczka and James G. Neuger - Oct 23, 2011 7:24 PM GMT+0700
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A demonstrator dressed in a Greek national flag protests outside the parliament during the second day of a national strike in Athens. Photographer: Kostas Tsironis/Bloomberg

European leaders started the 13th crisis summit in 21 months seeking a breakthrough over how to stamp out the Greece-led debt shock that threatens to tip the world into a recession.

Chancellor Angela Merkel of Germany, Europe’s dominant economy, played down the odds of an agreement today to beef up the euro bailout fund, cut Greece’s debt without triggering a default, shield banks from the fallout and insulate Italy and Spain from the turmoil.

“Today one shouldn’t expect decisions,” Merkel told reporters before the Brussels summit. She spoke of “a technically complex process” with the aim of forging a comprehensive strategy at the next summit in three days.

With President Barack Obama and Chinese Premier Wen Jiabao piling on the pressure, Europe’s room for maneuver narrowed after a report showed Greek finances worsening. Measures on the table include writedowns of as much as 50 percent on Greek debt, 100 billion euros ($139 billion) in fresh capital for banks and the pooling of two rescue funds to deliver as much as 940 billion euros to contain the crisis.

After meetings at EU offices, luxury hotels and a suburban Brussels nature park yesterday, the scene shifted to EU headquarters today for a session of all 27 EU leaders. It is slated to end around 3 p.m., to be followed by a meeting of the 17 euro leaders that will stretch into the evening.

France Rattled

The mayhem began in Greece in October 2009 with the revelation that its finances were worse than previously reported. Since then, 256 billion euros of bailouts have failed to stem the tide, which rattled France this month, prompting Standard & Poor’s to warn it may lose its top credit rating.

France’s banks can cope with a Greek debt writedown of about 50 percent, Budget Minister Valerie Pecresse said on France 3 television today. She said banks can boost capital “using their own resources,” falling back on the government only as a last resort.

On a European scale, finance ministers yesterday tabbed banks’ needs at about 100 billion euros in capital after marking sovereign-debt holdings to market values, said a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because the talks are continuing.

‘Chilling Effect’

“The crisis in the euro zone is having an effect on all our economies, Britain included,” U.K. Prime Minister David Cameron said today. “It’s having a chilling effect. We need to deal with this issue.”

Merkel and French President Nicolas Sarkozy took center stage late yesterday in trying to defuse German-French tensions over how to get more out of the 440 billion-euro rescue fund, the European Financial Stability Facility.

Afterward, Merkel was spotted sipping white wine with top aides in the bar of the Hotel Amigo a block from Brussels’ gabled main square. Sarkozy, staying at the same hotel, went straight to his room.

The German and French leaders held a pre-summit meeting today with Italian Prime Minister Silvio Berlusconi, an Italian official said without disclosing the outcome. Merkel and Sarkozy plan to brief the press before the start of the euro-area summit later today, a spokesman for Sarkozy said.

Finance ministers searched for other ways to leverage the EFSF after Germany and the European Central Bank rejected French calls for the fund to morph into a bank with the ability to borrow from the ECB.

ECB Bond Purchases

Narrowing the options for expanding the fund’s reach, ministers discussed setting up an EFSF-insured pool to entice outside investors including sovereign wealth funds to buy troubled euro-area government bonds, said a person familiar with the matter.

The special pool was weighed alongside the option of extending the EFSF’s coverage by offering 20 percent to 30 percent insurance on new bond sales by countries like Italy.

The fate of bond purchases by the Frankfurt-based ECB is also up in the air. The central bank has bought 165 billion euros of bonds, overriding opposition from Germans on its policy council.

Central bankers have expressed reluctance to step up the purchases, which started with Greece, Ireland and Portugal last year and widened to Italy and Spain in August as those markets came under attack.

Dissenting Footnote

“One shouldn’t demand more from the ECB than it can achieve according to its statutes,” Austrian Chancellor Werner Faymann said today.

Central bankers are at the center of the dispute over writedowns for Greek bondholders. A reminder came on Oct. 21 when the ECB put a dissenting footnote into an assessment of Greece’s finances that envisioned writedowns as high as 60 percent.

That report, co-authored by the ECB, European Commission and International Monetary Fund, said Greece’s finances have “taken a turn for the worse” and called for bondholder losses that go beyond the 21 percent negotiated in July.

Greek Prime Minister George Papandreou said two years of austerity have stretched citizens’ tolerance, calling on the rest of Europe to live up to its responsibilities.

“We are a proud people, we are a proud nation, we demand that respect,” Papandreou said today. “But it’s been proven now that the crisis is not a Greek crisis. The crisis is a European crisis. Now is the time that we as Europeans need to act decisively and effectively.”

Greek Loan

Officials are considering five scenarios to update the July agreement on losses for bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so-called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.

Finance ministers on Oct. 21 signed off on the payout of the EU’s 5.8 billion-euro share of an 8 billion-euro loan to Greece. It’s the sixth installment of a 110 billion-euro package awarded in May 2010.

To contact the reporters on this story: Tony Czuczka in Brussels at aczuczka@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net